CNH: USD/CNH Getting Closer To 7.00 Downside Test, CNY Onshore Gains Accelerate
USD/CNH spot has broken to fresh lows, currently near 7.0210, levels last seen at the start of Oct 2024. Aiding sentiment has been onshore spot USD/CNY breaking under 7.0300. Onshore spot CNY gains have accelerated in recent sessions, with the pair managing to break under support that held ahead of the 7.0400 figure level. For USD/CNH this continues to create risks of a test of the 7.000 handle, which we saw briefly in Sep last year.
- Earlier, we had the USD/CNY fix (7.0523), which was set comfortably above market forecast, but still made a fresh low to Sep last year. The fixing error was quite high at +227pips, which is close to record highs for the fixing error since 2018 (when BBG started compiling market consensus forecast for the fixing outcome.).
- Still, the fact that the actual fixing continues to track lower and onshore spot is only modestly below the fixing (officially allowed to deviate to -2% from the fixing in USD/CNY terms) suggests there is more room for spot USD/CNY to track lower. This in turn creates lower USD/CNY fixing risks in sessions ahead (assuming broader USD sentiment stays softer as well).
- For now the market seems comfortably that the authorities are not pushing back hard on yuan appreciation pressures. This may change if we test under 7.000 ahead of year end.
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RATINGS: Moody's Upgrades Italy To Baa2 From Baa3, Still A Notch Below Others
The Moody's upgrade to Italy's credit rating announced late Friday was the first from the agency since 2002 but shouldn't be considered a major surprise. Among the 3 major ratings agencies, Moody's had the lowest rating on Italy - by two notches (Fitch and S&P both BBB+).
- So this upgrade to Baa2 from Baa3 represents something of a closing of that gap rather than a major breakthrough for Italy.
- From the release:
- "The rating upgrade reflects a consistent track-record of political and policy stability which enhances the effectiveness of economic and fiscal reforms and investment implemented under the National Recovery and Resilience Plan (NRRP). It also points to prospects of further policy actions supporting growth and fiscal consolidation beyond the plan's deadline in August 2026. As a result, we expect that Italy's high government debt burden will gradually decline from 2027 onwards."
FED: Heading Into Its Final Weeks, QT Pace Remains At $20B/Month (2/2)
On the asset side of the Fed balance sheet, we saw a $25B drop in assets, of which just $2B could be attributed to QT in one of its final weeks (ends Dec 1).
- Instead it was a $6B drop in dealer repo operations vs a week earlier, and $17B in "other" areas that aren't related directly to monetary policy and typically don't have any significant impact on the size of the balance sheet (such changes are largely due to items such as bank premises, accrued interest, and other accounts receivable.)
- Discount window takeup edged up $0.3B to $6.1B but remains relatively low.
- QT has totaled just under $21B over the last month, around the expected pace, though as noted this will flatline in December with a pickup in net bills as MBS proceeds are rolled over into T-bills.
LOOK AHEAD: US Week Ahead: Retail Sales, PPI & Claims Headline Thanksgiving Week
A Thanksgiving-condensed week sees data highlights from delayed retail sales and PPI reports for September on Tuesday (Nov 25) before a Wednesday release for weekly jobless claims (Nov 26). Aside, the Fed’s Beige Book should also offer another important update on Wednesday for latest liaison reporting, with no Fedspeak currently scheduled around the holiday and the FOMC media blackout due to start on Saturday, Nov 29.
- As we regularly comment in this weekly publication, Redbook and Chicago Fed CARTS indicators point to solid nominal growth in retail sales, something broadly reflected in analyst consensus for the release.
- PPI inflation will offer a useful albeit not overly timely update on input cost pressures.
- Jobless claims will be watched particularly closely, both for latest initial claims for signs of layoffs and a notable update for continuing claims. The latter covers the payrolls reference period for November and will be an important reference point for FOMC members trying to get a sense of latest unemployment rate clues with the next payrolls reports coming after the Dec 9-10 FOMC decision (going into it with this week’s 0.12bp rise to 4.44% back in September).
