Yuan Hits Highest In Three Weeks, MLF Ops Eyed

Offshore yuan finished the day higher on Wednesday, USD/CNH dropping to 6.5305, the lowest in three-weeks, before recovering slightly so close at 6.5316. The rate has now fallen 0.6% since April 9, and 0.8% since the start of April.

• Markets will be congnisant of CNY 100bn of 1-year MLF loans maturing today, alongside the standard 7-day reverse repo maturities. After comments from the PBOC's head of monetary policy department Sun said last week that the bank would ensure ample liquidity. Repo rates have been steadily rising since the start of April, the overnight repo rate around 12bps higher in the period, at a time when banks help corporate clients pay taxes In Q1 the PBOC drained around CNY 40.5bn of liquidity from the system in a bid to stem leverage increases. If the bank was willing to let more liquidity leave the system, it could be taken as a tacit tightening signal and put upward pressure on the yuan. Estimates range from a matching maturities with injections, to a net injection of CNY 300bn.
• Meanwhile, there could be caution after the Chinese state council said earlier this week that failing local government financing vehicles should restructure or go bust if they can't repay their debts, suggesting the state-linked sector is closer to seeing its first defaults on publicly traded bonds.