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CNH Outperforming Broader USD Strength, LPRs To Be Cut

CNH

USD/CNH got to fresh YTD highs post the Asia close on Friday. We nearly touched 6.8450, before edging lower into the close. The pair has spent some time above 6.8400 in early trade today, but hasn’t made fresh highs, last tracking 6.8400. The focus today is on the LPR announcements, which should see both the 1yr and 5yr rates cut.

  • CNH weakness is in line with broader USD strength, but the currency outperformed broader dollar trends last week, with the NEER rising modestly (up +0.37% last week). We have seen such trends unfold before during periods of USD outperformance in 2022.
  • Fresh highs in USD/CNH levels are not spooking the options market though. 1 month implied options are higher, but at just under 6.50%, we remain below previous YTD highs (+8%). In the risk reversal space, we remain in a 1.20/1.30 range.
  • The focus will be on the upcoming LPR announcements. The market expects a 10bps cut to both the 1yr (to 3.60%) and 5yr (to 4.35%), although the risk is for a bigger move in the 5yr (see our write-up here).
  • Whilst LPR rates won't directly impact offshore sentiment, a larger cut may signal concern around the extent of the economic slowdown. This could pressure government bond yields lower and add upside risks to USD/CNH. The US-CH 2yr differential is trending higher, last +121bps.
  • Finally, power cuts to manufacturers in the Sichuan province (due to the lack of supply) adds further downside economic risks.
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