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Dollar Losing Ground As Equities Head North

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Offshore yuan gained through the day on Monday, USD/CNH heading into the close at 6.4411, just above the key 6.44 handle. The move had two drivers, a weaker USD as the greenback declined for a second day on hopes for US stimulus, while the PBOC helped reassure markets saying its policies would remain stable yet flexible.

  • The PBOC released its quarterly monetary report after market on Monday, the PBOC downplayed the significance of its recent activity in the OMO market, and reiterated its policy stance remains neutral and unchanged. The bank also said that markets were reading too much into daily operations; "These changes do not fully reflect the trend of market interest rates, nor do they represent changes in the central bank's policy rates," it said. The bank also warned about the risk of asset bubbles stemming from the policies of other central banks.
  • 1-month implied volatility in USD/CNH has risen slightly today, after falling yesterday, 1-month vol last 5.0625% up 13 bps. Volumes are thin ahead of the LNY period which could exacerbate moves.
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