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USD/CNH Back Above 6.7700

CNH

USD/CNH continues to push higher. The pair now above 6.7700, running into some resistance above 6.7760 earlier. This is the sharpest drop in CNH since around a month ago. We remain within well worn ranges though. Since late May moves up in the pair have generally run out of steam above 6.7850 and in the low 6.7900 region. Beyond that of course is the YTD highs close to 6.8400, from mid May.

  • The 2yr bond yield in China is down by 8bps today, back sub 2.10%, unwinding most of the recent bounce. The MLF rate cut and weaker than expected activity data for July has been a strong combination today in terms of driving rate moves.
  • This 2yr rate hasn't spent much time below 2.1% this year and if we break lower we will be back at fresh lows from early 2020. There have been similar moves across the curve, with the 5yr and 10yr down by 8bps and 7bps respectively.
  • Historically, correlations between USD/CNH and yield differentials haven't been that strong, however, events from today are likely to sharpen focus on divergences in monetary policy with the US.
  • The chart below shows USD/CNH versus the 2yr differential. We are almost at fresh YTD highs for the yield differential, so this should lend near term support to USD/CNH. A quick move to 6.8000 or higher could see the authorities looking to lean against depreciation pressures though.

Fig 1: USD/CNH Versus The US-CH 2yr Yield Differential

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USD/CNH continues to push higher. The pair now above 6.7700, running into some resistance above 6.7760 earlier. This is the sharpest drop in CNH since around a month ago. We remain within well worn ranges though. Since late May moves up in the pair have generally run out of steam above 6.7850 and in the low 6.7900 region. Beyond that of course is the YTD highs close to 6.8400, from mid May.

  • The 2yr bond yield in China is down by 8bps today, back sub 2.10%, unwinding most of the recent bounce. The MLF rate cut and weaker than expected activity data for July has been a strong combination today in terms of driving rate moves.
  • This 2yr rate hasn't spent much time below 2.1% this year and if we break lower we will be back at fresh lows from early 2020. There have been similar moves across the curve, with the 5yr and 10yr down by 8bps and 7bps respectively.
  • Historically, correlations between USD/CNH and yield differentials haven't been that strong, however, events from today are likely to sharpen focus on divergences in monetary policy with the US.
  • The chart below shows USD/CNH versus the 2yr differential. We are almost at fresh YTD highs for the yield differential, so this should lend near term support to USD/CNH. A quick move to 6.8000 or higher could see the authorities looking to lean against depreciation pressures though.

Fig 1: USD/CNH Versus The US-CH 2yr Yield Differential

Keep reading...Show less