CHINA PRESS: China Special Bonds Up Y/Y During First Five Months

The BBDXY range overnight was 1216.34 - 1223.26, Asia is trading around 1219. The USD continues to be sold on any rallies, Asia has seen a small bounce on the news of a US-China meeting to be held in Switzerland.

• Jon Turek of JST Advisors via BBG - “ What is going on in Taiwan is very interesting in terms of where TWD can go but is also an extreme example of a larger point that I have been trying to make about the USD short case. In terms of global balance sheets, the imbalance is now on the asset side, not the liability side. And whether these moves in TWD reflect part of a political outcome or just realization that hedge ratios are too low, I don’t think it really matters. The imbalance has seemingly reached a tipping point. It is worth saying, Taiwan is the most extreme example of this with a NIIP position more than double domestic GDP, but I think it speaks well to this broader paradigm shift that seems to be happening in terms of global exposure to the US. The reaction function for Asian surplus countries has been very simple. Invest in US, allocate more to US and hedge less in FX. If any of these three things is changing, that is a big deal given the size of these flows. Even just adjusting hedge ratios is huge if the Lifers have been running ratios less than 60% on over $700bln of assets.”
• This adds weight to a market that was already bearish the USD as an overweight in US assets has begun to be reduced and Asia is now joining the fray.
• Resistance in the BBDXY is around 1230, the market failed here initially and price action suggests sellers will be around there once more. A move back through the Weekly support towards 1200 will see the move accelerate. 
• Data : US FOMC

Fig 1: BBDXY Weekly Chart

Source: MNI - Market News/Bloomberg

• The PBOC issued CNY195.5  bn of 7-day reverse repo at 1.5% during this morning’s operations.
• Today’s maturities CNY 530.8 bn
• Net liquidity withdrawal CNY335.5 bn.
• The PBOC monitors and maintains liquidity in the interbank system through the issuance of reverse repo.
• The CFETS Pledged Repo Deposit Institutions 7 Day Weighted is at 1.61%, from yesterday’s close of 1.72%.
• The China overnight interbank repo rate is at 1.65%, from the prior close of 1.64%.
• The China 7-day interbank repo rate is at 1.62%, from the prior close of 1.70%.

*** The PBOC announced a cut to the 7-day reverse repo rate to 1.4% starting from tomorrow.   

European natural gas rose on Tuesday following the EU’s announcement of a plan to end imports of Russian fossil fuel by end-2027. Other supportive factors included higher oil prices, seasonal maintenance in Norway, colder weather forecast for parts of Europe and hopes that trade agreements will be reached with the US.

• European prices jumped 6.1% to EUR 34.93, close to the intraday high, to be up over 8% in May to date.
• The details of the plan to end imports of Russian energy will be published in June but it seems that they will be phased out with no new contracts and an end to existing spot market agreements by the end of this year, according to Bloomberg. Longer-dated contracts will be wound up by end-2027.
• US gas prices fell 1.9% to $3.48 on Tuesday and so far today are up 2.4% to $3.55 following news of US-China trade talks to take place in Switzerland with US Treasury Secretary Bessent and Trade Representative Greer meeting China’s Vice Premier Lifeng on the weekend.
• US gas fell yesterday because of less demand due to scheduled maintenance at LNG facilities and higher inventories. Weather forecasts are also signalling that cooling demand is unlikely for now.
• Lower prices have attracted Asian buyers into the gas market and if there is a US-China trade deal LNG shipments could rise again to China, which could make European refilling more difficult. It has benefited from less global demand over the last month.