Dollar Is Happy, Pound Is Sad, And There’s Some Yuan Shenanigans Afoot

It’s about Dudley for the dollar which rose to a three-week high versus the yen overnight.

As usual, it was a good cop/bad cop type of deal on Monday with Evans coming across as some semblance of dovish yesterday evening (“could delay next hike until December to assess data”), but Dudley’s “need to do it now so we don’t have to slam on the brakes later” soundbite combined with his contention that “the economic expansion has a way to run and that wage growth is likely to quicken,” supported the greenback.

USDJPY

“The dollar has been lifted by comments from Fed officials who sounded upbeat on the U.S. economy,” Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. in Singapore said, before cautioning that “any weakness in Asian currencies will be moderated by the positive tone set by the Northern Hemisphere equity markets, which bode positively for local bourses in Asia.”

“Dudley’s comments are driving the dollar rally,” added Kumiko Ishikawa, FX market analyst at Sony Financial Holdings in Tokyo. “They reflect the Fed’s general feeling. Evans is a dove but today’s comments were hawkish.”

Whatever. Feels like people desperately seeking a reason to trade to me.

The pound took a dive a few hours ago, after the BOE’s Carney says the time for a rate hike is not now as inflation pressures are subdued. He also said he’s still worried about the impact Brexit will have on the U.K. economy.

GBPUSD

China’s interesting today as well. The yuan (both onshore and offshore) has pretty much retraced its short squeeze gains from late last month:

Yuan

But here’s the funny part. The onshore yuan rallied 0.16% in the 10 minutes before 4:30 p.m., which just happens to be the timestamp the PBoC uses to help determine the next day’s fix. 

USDCNY

Obviously, that’s policy banks selling dollars and you didn’t need the five anonymous traders who confirmed as much to Bloomberg to see it. Those same banks stopped selling dollars right after 4:30.

What’s especially notable here is that this just underscores the fact that the PBoC is manipulating all sides of this. They’re using the new “countercyclical adjustment factor” to “fix” the fix, and they’re also intervening in the spot market.

Earlier in the session, the onshore spot was trading at a 0.35% discount to the fix, the widest in a month.

“It seems like PBOC intervention,” said Tommy Xie, an economist at OCBC Bank in Singapore. “Policy makers want to narrow the gap between the fixing and the onshore spot rate and arrest any quick decline in the yuan [but] this is not going to fundamentally reverse expectations of further declines.”

They’re trying “to ensure the 4:30 pm onshore spot closing level is stronger than 6.8300, so as to influence tomorrow’s fixing,” the above-cited Khoon Goh, adds.

Meanwhile, China’s one-year government bond yield mercifully fell 6bps, the most since end-March, to 3.52%. I say “mercifully” because the curve is already inverted.

Offshore interbank rates eased notably:

  • Overnight offshore yuan interbank rate in Hong Kong declines 34bps to 1.3547%, lowest since Oct. 7, according to fixing by Treasury Markets Association.
  • One-week CNH Hibor slumps 94bps to 2.6566%, lowest since Nov. 23
  • One-month CNH Hibor slides 62bps to 4.3812%

And then there was Fitch, calling for Chinese growth to come in at 5.9% in 2018 and 5.8% in 2019, lower than the Party’s targets. “The forecasts reflect increasing challenges of supporting growth in the face of ever higher leverage,” Fitch notes. In other words: “the forecasts reflect reality.”

Finally, MSCI will decide whether to include China A shares into benchmarks today. This would be the fourth time China’s given this a shot. More on that later.

Gold’s worth noting, as it’s trading near the lowest in a month presumably in response to hawkish Fedspeak:

Gold

Asian shares were mostly lower, Europe’s mixed.

  • Nikkei up 0.8% to 20,230.41
  • Topix up 0.7% to 1,617.25
  • Hang Seng Index down 0.3% to 25,843.04
  • Shanghai Composite down 0.1% to 3,140.01
  • Sensex down 0.01% to 31,308.11
  • Australia S&P/ASX 200 down 0.8% to 5,757.25
  • Kospi down 0.07% to 2,369.23
  • FTSE 7530.92 7.11 0.09%
  • DAX 12915.94 26.99 0.21%
  • CAC 5321.45 10.73 0.20%
  • IBEX 35 10800.80 -48.10 -0.44%
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