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PBoC’s interventions to depreciate CNY seems to be successful as the Chinese central bank (PBoC) continues to weaken its currency via the fixing, the fixing rates are generally in line with what the fixing model suggests so far. USDCNY fixing rates continue to spike higher, which has triggered speculation that further CNY depreciation is looming on the horizon.
China’s PPI deflation eased significantly in July, there have emerged strong purchase flows in onshore bond markets, which drove the 10-year government bond yields to below 2.7% this morning, a historical low. Of course, the market is pricing in aggressive easing measures from the central bank. We also expect the PBoC to cut key rates and the RRR.
However, this is seemingly consistent with so called “liquidity trap”, that is, the central bank has injected a lot of liquidity into the system, but the genuine demand for money such as investment remains sluggish soft.
Alternatively, the money chases the financial assets, including bonds and properties in the first-tier cities. This is a global phenomenon, to be honest. Looking around, the bond yields dropped dramatically globally, which is a combination of gloomy growth outlook and lack of high-quality assets.
Outcomes of PBoC framework:
This week’s big story is surely the successful shift in China’s FX policy. A year ago, USD/CNY was trading at 6.21 and just beginning it’s rapid jump (it reached 6.4 in August 2015).
December/January saw another sharp fall by the Yuan, but since April, the tactic has shifted to a slower move that has ruffled remarkably few global feathers.
Overall, it’s a 7.4% USD/CNY rise in a year, an 8.4% rise in EUR/CNY and a 23% fall in CNY/JPY. That’s a lot of deflation being exported to the G3 and it’s very unlikely we’re done yet.
For now, the markets are quiet and risk appetite is strong, but a gradually slowing Chinese economy, weak global trade and a steadily depreciating Yuan don’t make a healthy recipe for FX yield-hunters beyond the short-term. Biding time and setting new shorts in trade-sensitive currencies in due course feels right.
