CNH: An Alternative To The USD ?
Jun-20 03:29
The CNH has been remarkably stable in what has been a turbulent period for markets. China has been highlighting this fact recently and hoping this could lead to it being adapted more rapidly as a reserve currency. The recent loss of faith in the USD has also pointed to the fact there are few real alternatives, the Chinese are trying their best to show the Renminbi can offer another choice.
- (Bloomberg) - "PBOC Governor Pan is using his speech at the Lujiazui Forum to drive ahead with the narrative of a bigger global role for the renminbi. By calling for increased issuance of SDR’s it’s a continuation of previous Chinese comments designed to promote the yuan."
- Mohamed A.El-Erian on X: ”The latest speech by Pan Gongsheng, Governor of China's central bank, is an important read. He goes quite far in describing a future multi-polar global order where "a few sovereign currencies co-exist" as reserve currencies, "competing with each other and checking and balancing each other." He also suggests the dollar has been "instrumentalized and weaponized" and that the Chinese currency is gaining a larger international role.” https://x.com/elerianm/status/1935379187248124277
- Brad Setser on X: “The Chinese yuan is, ever so slightly, starting to appreciate against the dollar. Nothing big, and from a very weak level, but something to watch.”
- “Over the last few years the yuan has been increasingly managed v the dollar not v the basket (see the stable fix over the last two years). For all the talk of the yuan as a new reserve currency, what really matters for now is how it is managed v the dollar.”
- “I have been a bit slow to make this call publicly, but the preponderance of evidence now suggests the yuan is facing appreciation pressure that China is (for now) resisting.”
- “The positive settlement number in May was the last bit to fall in place … for the last few quarters the state banks have been adding to their net foreign assets -- which implies that private outflows no longer match the full trade surplus.” See Graph Below
- “But I increasingly think something significant has changed ... namely the direction of flow pressure on the yuan. And what actually matters for the world economy is not how China talks about currency multipolarity but how China manages its currency against the good old dollar.” https://x.com/Brad_Setser/status/1935837436128772171
Fig 1: China Foreign Exchange Flows
Source:@Brad_Setser
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JGBS: Bear-Steepening Remains At Lunch
May-21 03:17
At the Tokyo lunch break, JGB futures are slightly weaker, -3 compared to the settlement levels.
- “Japan's sovereign debt market is flashing a warning to the central bank to be cautious when dialing back its bond purchases, as investors are shunning government debt auctions and yields are soaring. The market is particularly concerned about longer-maturity debt, which has been dependent on purchases from large Japanese institutions, and the upcoming sale of 40-year bonds on May 28 may test the market further.” (per BBG)
- “Long-dated Japanese government bonds saw little relief on Wednesday after a poor auction result sent yields to record levels and as more debt sales loomed in the weeks ahead. The selloff in bonds is a quandary for the Bank of Japan, which is trying to taper its debt purchases and normalise monetary policy. Rising long-term borrowing costs are also a warning sign for the highly indebted Japanese government.” (per RTRS)
- Cash US tsys have extended yesterday's bear-steepener, with yields flat to 2bps higher, in today's Asia-Pac session.
- Cash JGBs have bear-steepened across benchmarks, with yields flat to 6bps higher. The benchmark 20-year yield is 3.8bps higher at 2.575% after yesterday’s poor auction.
- Swap rates are flat to 6bps higher, with a steeper curve.
CHINA: Bond Futures Steady
May-21 03:14
- Bond futures are doing very little in China today as the Central Bank injected liquidity via the OMO.
- The 10YR future is lower by just -.01 at 108.82 and remains just below the 20-day EMA of 108.86. The 50-day EMA is at 108.71
- The 2YR future is unchanged from last night's close of 102.37 and remains well below all major moving averages. The 20-day EMA is at 102.49.
- Unsurprisingly bonds are doing very little with the CGB 10YR unchanged at 1.66%
- People’s Bank of China Governor Pan spoke at a conference on Monday where he reiterated that China's monetary policy will remain loose.
- Pan indicated that he intends to utilize existing policies to improve the quality and efficiency of financial support for the real economy with focus on strengthening support for key areas like technological innovation, boosting consumption, and stabilizing foreign trade.
FOREX: USD Weakness Continues, Led By Safe Havens
May-21 02:57
The USD remains under pressure in the G10 space, with safe havens outperforming at the margins in Wednesday trade to date. USD/CHF is back to 0.8230, up 0.65% in CHF terms, continuing Tuesday's outperformance trend for the Swiss Franc. This puts 0.8200 back in focus, with dips in this pair sub this level supported so far in May. USD/JPY is back under 144.00 for the first time since May 8.
- There doesn't appear to be a fresh catalyst for today's move, other than a continuation of trends from Tuesday. Lower US equity futures (off 0.25-0.30%), may be aiding the safe havens at the margin. US Tsy yields are holding up at this stage, led by the back end of the curve, 10yr above 4.50%, 20yr near 5.02%.
- The broader BBDXY index is down around 0.30%, last near 1219. As we noted earlier, a close back below 1220 and the focus will return once more back to the lows for the index (1216 handle in earlier May, 1212 in April).
- EUR/USD is up 0.35% to 1.1320/25, while AUD and NZD are +0.20-0.25% higher, but remain within recent ranges.
- USD/Asia pairs are mostly lower, although USD/CNH lags these moves, still above 7.2000 at this stage.
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