How sustainable is this CNH funding squeeze? - Nomura

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 13, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Bali) - The Asia FX Strategy Team at Nomura does not expect authorities to sustain the tight CNH liquidity conditions for a prolonged period to limit long USD/CNH positioning. Below are several reasons why.

    Key Quotes

    1- If the objective of the recent CNH intervention was to bring spot USD/CNH back towards onshore spot USD/CNY, then this has been achieved

    2 - Intervention in recent history has also been temporary. Note that on 8 September the PBoC took action to narrow the spread between CNH/CNY (spot spread rose to around 1000pips) by both intervening in the offshore market and announcing a relaxation of requirements for multinational corporations in China to remit CNH back onshore.

    3 - Deteriorating liquidity could lead to more cautious lending. Currently, we do not expect the CNH liquidity squeeze to affect interbank market liquidity or HK corporate activity given that most local bank loans are denominated in HKD. However, continued very high CNH funding costs at the margin reflect deteriorating liquidity and could result in more cautious lending

    4 - If the current onshore-offshore yield gap remains elevated this could attract some onshore deposits to migrate offshore. Indeed, when the funding situation eventually stabilizes, we expect more demand for dim sum bonds considering their superior yield relative to onshore bonds.

    5 - We also continue to believe that the medium-term goal of the PBoC is to allow for greater market determination of RMB . This is especially with the relatively sharp drawdown in headline FX reserves and the risk of a more rapid fall in the coming months if the PBoC allows its short FX forward book to mature
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