Yuan Benefits From Broader USD Downtick, Yield Spreads & Policymaker Support

CNH initially benefits from the USD downtick during early London trade.

• The move stalls as Tuesday’s USD/CNH low holds (7.2573), with the rate back above 7.2600.
• PBoC rhetoric pointing to continued focus on supporting the growth of the offshore yuan and the need for a stable exchange rate supported the redback in Asia hours.
• The daily mid-point fixing saw the Bank maintain its lean against yuan weakness.
• Elsewhere, a BBG sources piece suggested that “some of China’s regional authorities are guiding firms to slow purchases of foreign currencies in a sign the nation is taking further measures to discourage capital outflows amid yuan weakness.”
• We have flagged policymaker sensitivity surrounding potential capital outflow pressure on plenty of occasions in the past and this will have been yuan-supportive.
• Finally, yield differentials provided another source of support for the yuan after the PBoC confirmed that it will sell low risk bonds (including government bonds) when necessary, while paying close attention to bond market conditions and any potential risks.
• The above points negated any spill over from a slightly negative session for mainland Chinese equity benchmarks.
• The bullish technical setup remains in play in USD/CNH, with the mid-April high (7.2831) providing next resistance.
• Official Chinese PMI data is due on Friday.

Fig. 1: USD/CNH