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Yuan Defense Continues, But Relative Yield Spreads Still Point To USD/CNH Upside

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USD/CNH is slightly lower, last near 7.2600, but has maintained tight ranges overall in the first part of Wednesday dealings. This keeps us comfortably within April to date ranges.

  • Sources of support have been from the steady CNY fixing outcome. Yesterday's set above 7.1000 saw USD demand emerge, but there was no follow through. The authorities are still guarding against the pace of depreciation.
  • CNH liquidity also remains tight. The 1 month CNH Hibor in HK above 5%, close to fresh highs since 2018. Still, US-CH government bond yield differentials point to higher USD/CNH levels see the chart below.
  • Insofar as these differentials represent a rough proxy for monetary policy differentials between the two economies, it suggests downside in USD/CNH will be limited in the near term, albeit without a sharp pull back in spreads.
  • Some sell-side analysts have turned more cautious on further China policy easing post yesterday's Q1 GDP beat, but tightening is clearly not on the agenda.
  • Onshore USD/CNY spot is also showing very limited downside and continues to trade close to the top end of the daily fixing band, which still suggests underlying onshore depreciation pressures.

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

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USD/CNH is slightly lower, last near 7.2600, but has maintained tight ranges overall in the first part of Wednesday dealings. This keeps us comfortably within April to date ranges.

  • Sources of support have been from the steady CNY fixing outcome. Yesterday's set above 7.1000 saw USD demand emerge, but there was no follow through. The authorities are still guarding against the pace of depreciation.
  • CNH liquidity also remains tight. The 1 month CNH Hibor in HK above 5%, close to fresh highs since 2018. Still, US-CH government bond yield differentials point to higher USD/CNH levels see the chart below.
  • Insofar as these differentials represent a rough proxy for monetary policy differentials between the two economies, it suggests downside in USD/CNH will be limited in the near term, albeit without a sharp pull back in spreads.
  • Some sell-side analysts have turned more cautious on further China policy easing post yesterday's Q1 GDP beat, but tightening is clearly not on the agenda.
  • Onshore USD/CNY spot is also showing very limited downside and continues to trade close to the top end of the daily fixing band, which still suggests underlying onshore depreciation pressures.

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

Keep reading...Show less