Yuan Depreciation Continues As PBOC Fixing Surprise Underwhelms

The PBOC failed to guide offshore yuan back below the CNH7.0 figure via another stronger than expected fixing of the mid-point of permitted UDS/CNY trading band. The reference rate was set 456 pips below the expected level, which means that the error term was smaller than in the past two sessions. The market interpretation appeared to be that the authorities were not too upset by the breach of CNH7.0 as they refrained from delivering a larger fixing surprise and set the USD/CNY mid-point at a new cyclical high.

• Spot UDS/CNH rallied after the PBOC fix and extended gains as data showed that the decline in China's new home prices accelerated. The rate ran to a session high of CNH7.0350 before stabilising slightly below there (last at CNH7.0254). A set of generally better-than-expected Chinese activity indicators had little durable impact.
• The post-fix upswing in USD/CNH promoted broader greenback recovery, with the BBDXY index clawing back its initial losses. A rebound in U.S. Tsy yields facilitated renewed USD appreciation.
• Recovery in U.S. dollar inspired USD/JPY to retrace its sell-off into the Tokyo fix. BBG flagged concerns that Japanese authorities could intervene in FX markets ahead of a public holiday this coming Monday as a potential driver of the initial drop in USD/JPY. FinMin Suzuki reiterated that Japan won't rule out any options in terms of FX responses.
• The Antipodeans found poise despite yuan weakness, with hawkish musings re: regional central banks doing the rounds. NZ 2-Year swap jumped as ANZ revised their terminal OCR level forecast higher. Across the Tasman, RBA Gov Lowe said a few hikes will be needed to tackle inflation, albeit tightening will eventually slow.
• Focus turns to final EZ CPI, UK retail sales, flash U.S. Uni. of Mich. Sentiment as well as comments from ECB's Lagarde, Villeroy and Rehn.