CNH liquidity to stay tight near term

CNH rates have hovered around historically high levels in recent weeks, and showed little signs of easing after the PBoC's 25bps policy rate cut on 28 February. 

Liquidity tightness in the CNH market is expected to persist in the near future. The currency is likely to stay under pressure, leading to continuing CNH liquidity outflows, which should cause USD-CNH to continue trading at a discount to USD-CNY. 

Outflows under the capital account are also likely to persist, with northbound flows under the ShanghaiHong Kong Stock Connect programme exceeding southbound flows. This is particularly the case as further policy easing boosts the onshore equity market. 

Standard Chartered notes in a report on Monday:

• We expect the CNH CCS curve to flatten. We continue to recommend paying on dips at the front end of the CCS curve (1Y), and also recommend a 1Y5Y CCS flattener trade at current levels. 
  
  
• While CNH liquidity conditions are likely to remain tight, supporting the front end of the curve, we expect long-dated CCS rates to trend lower from here due to a flurry of swap-based issuance.