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CNH: USD/CNH Supported By Higher Yield Differentials, But Recent Ranges Holding

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USD/CNH has tracked higher in the first part of Friday trade, last just above 7.2825, but we remain within recent ranges. Highs this week rest at 7.2927, while earlier Dec highs were at 7.3148. Dips sub 7.2500 have been supported, with breaks the 20-day EMA support zone proving to be buying opportunities. This support zone currently rests near 7.2540. The RSI (14) is elevated but sub overbought levels, last near 60.0. 

  • Onshore yields are continuing to trend lower. The take away from the CEWG being more monetary stimulus is coming (reinforced by the PBoC's policy stance shift earlier this week).
  • In turn this has helped push US-CH government bond yield differentials higher. The 10yr spread to fresh record highs, close to +254bps, see the green line on the chart blow.
  • Such a backdrop, particularly with next week's Fed meeting fully priced for a cut, is likely to be supportive for the USD/CNH backdrop and could reinforce a buy on dips strategy.
  • Still, the authorities appear to be guarding depreciation risks we approach Trump's inauguration in early 2025. If the USD/CNY fix is held just under 7.2000 between now and then, the maximum spot upside (is just above 7.3400). Hence further yield momentum in the USD's favor may see only a muted CNH response in the near term.
  • Outside of next week's Fed meeting, there will also be focus on China's monthly activity drop on Monday, which also includes Nov home prices. 

Fig 1: USD/CNH & US-CH Government Bond Yield Differentials 

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USD/CNH has tracked higher in the first part of Friday trade, last just above 7.2825, but we remain within recent ranges. Highs this week rest at 7.2927, while earlier Dec highs were at 7.3148. Dips sub 7.2500 have been supported, with breaks the 20-day EMA support zone proving to be buying opportunities. This support zone currently rests near 7.2540. The RSI (14) is elevated but sub overbought levels, last near 60.0. 

  • Onshore yields are continuing to trend lower. The take away from the CEWG being more monetary stimulus is coming (reinforced by the PBoC's policy stance shift earlier this week).
  • In turn this has helped push US-CH government bond yield differentials higher. The 10yr spread to fresh record highs, close to +254bps, see the green line on the chart blow.
  • Such a backdrop, particularly with next week's Fed meeting fully priced for a cut, is likely to be supportive for the USD/CNH backdrop and could reinforce a buy on dips strategy.
  • Still, the authorities appear to be guarding depreciation risks we approach Trump's inauguration in early 2025. If the USD/CNY fix is held just under 7.2000 between now and then, the maximum spot upside (is just above 7.3400). Hence further yield momentum in the USD's favor may see only a muted CNH response in the near term.
  • Outside of next week's Fed meeting, there will also be focus on China's monthly activity drop on Monday, which also includes Nov home prices. 

Fig 1: USD/CNH & US-CH Government Bond Yield Differentials 

Keep reading...Show less