The PBoC has spoken and markets, at least for the time being, have listened.
Coming off a week in which China decided that because i) markets are “unreal” and are generally populated by traders who often employ “irrational, herding actions,” and ii) those shady smart asses at Moody’s decided to downgrade the country for the first time since 1989 right in the middle of Beijing’s effort to deleverage the financial system, they were going to add a “counter-cyclical adjustment factor” to the yuan fix.
Or, in English, they were going to take a couple of steps back on the road to liberalizing the exchange rate in order to make sure they don’t end up having to add “capital flight” to the list of fires they’re trying to put out.
And so, on days when the PBoC thinks the spot rate is “irrational” they will not only intervene by selling dollars, they will also simply set the next day’s fix wherever they think it needs to be to compensate for your fucking “unreal, herding actions” during the previous session.
What does that mean? Well it means that this probably isn’t the time to be betting on further yuan depreciation and it’s why at least one measure of USDCNH sentiment turned bearish for the first time since 2013 this week:
Overnight, the PBoC set the yuan fixing at the strongest level since May 18 thus signaling their intention to keep pushing the currency higher and markets responded accordingly – albeit with a delay.
The initial reaction was muted. “The fixing is largely in line with calculations based on the old methodology, which seems to be without the counter cyclical policy,” said Mizuho’s Ken Cheung.
That was at roughly 9:20 p.m. EST. And it was off to the races after that.
By 1:30 a.m. EST the offshore yuan had strengthened beyond 6.8 for the first time since early February. “CNH gains spilled over to the onshore market, with several big Chinese banks selling dollars,” three onshore traders who asked not to be identified because
the Politburo will track them down and kill them they aren’t authorized to speak to the media told Bloomberg.
Just look at this:
We’re at the strongest levels for the offshore spot since November 4.
The CNH O/N deposit rate lept 58.6 percentage points to 60%, the highest since January 6 while CNH O/N HIBOR overnight climbed 15.73 percentage points to 21.08%, also the most since early January.
“The overnight Hibor rate is higher probably because China has drained offshore yuan liquidity, as merely the month- end effect wouldn’t boost rates that high,” Ngan Kim Man, Hong Kong-based deputy head of treasury at China Everbright Bank Co. said, adding that “the move is likely aiming to support the yuan exchange rate after the Moody’s downgrade.”
Oanda’s senior Asia-Pacific currency trader Stephen Innes concurs: “The sharp gain in the offshore yuan is partially due to the unwinding of short yuan positions because the high offshore yuan funding cost has made the currency too expensive to short, [so] bears with short yuan positions would need to cut their exposure.”
Yes, they certainly would.
“The fixing continues to come in stronger relative to where the dollar is trading, suggesting that the central bank sees China’s macroeconomic picture justifying a slightly firmer yuan,” Irene Cheung, currency strategist at ANZ offered.
And speaking of the “macro picture”, we got the official NBS manufacturing PMI last night, which printed at 51.2 in May (versus Bloomberg consensus of 51.0 and vs. 51.2 in April).
That was one of those “just good enough” numbers and even if it had come in light it wouldn’t have mattered for FX markets.
This seems like a good time to remind you of what we said on Tuesday in what turned out to be a pretty prescient post title:
Elsewhere overnight, the pound hit a more than five-week low following projections that suggest Theresa May’s Conservative Party could fall short of a majority in next week’s election, raising the specter of a hung parliament.
As Bloomberg writes, “the YouGov Plc study in the Times, based on a new model, showed the prime minister’s party may fall short of an overall majority by 16 seats — a contrast from just a few weeks ago when a solid Tory victory was seen as a foregone conclusion.”
The yen was rangebound and Treasurys were relatively quiet. Eurozone May Flash CPI printed below estimates at 1.4% y/y. That’s down from 1.9% a month ago and is the weakest reading this year.
Here’s a snapshot of global equities:
- Nikkei down 0.1% to 19,650.57
- Topix down 0.3% to 1,568.37
- Hang Seng Index down 0.2% to 25,660.65
- Shanghai Composite up 0.2% to 3,117.18
- Sensex up 0.1% to 31,204.54
- Australia S&P/ASX 200 up 0.1% to 5,724.57
- Kospi up 0.2% to 2,347.38
- FTSE 7561.61 35.10 0.47%
- DAX 12660.84 62.16 0.49%
- CAC 5319.23 13.29 0.25%
- IBEX 35 10922.70 45.80 0.42%