Squeeze in CNH money market rates likely to be temporary

The one-week CNH Hibor rate has spiked to 10.15 percent from 4.92 percent yesterday, to levels last seen since China had to intervene to fend off rapid capital outflows in early 2016. The rise in CNH Hibor rates is making it more expensive to hedge income in the CNH market.

The continued squeeze in HIBOR is seen as induced by the PBOC to ostensibly ward off speculative pressure on a weaker CNY.  CNY depreciation expectations increased after the G20 meeting and rising expectations of a potential Fed rate hike this year has put some depreciation pressure on emerging market currencies including CNY/CNH.

"We expect CNH Hibor rates to come down again in coming weeks as the Fed holds off from hiking and seasonal demand again declines," said Danske Bank in a report.

The People’s Bank of China (PBoC) has sent a signal to defend the 6.70 CNY level as state-owned agent banks have apparently been seen selling USD and buying CNH in the offshore market close to the 6.70 level (CNY currently trading at 6.67). CNH liquidity is tight around the Mid-Autumn Festival as demand picks up and should come down next week when the holiday is over. Chinese equities also finished near one-month lows ahead of a holiday that will shut the local markets until Monday.