Look, here’s the thing: if you were caught offsides on Tuesday by China intervening to engineer a yuan surge at roughly 2:00 a.m. EST…
… you can’t blame SocGen’s Jason Daw, because he tried to warn you hours earlier.
As we noted this morning, the PBoC apparently got fed up after the onshore spot closed at a discount to the fix for the 17th consecutive day.
And last week, there were already signs that Beijing was losing its patience as policy banks were seen selling dollars 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.
We also noted that USDCNH has been on the rise with the offshore yuan trading a material discount to its onshore counterpart – a notable shift from what we saw in the aftermath of the epic short squeeze that unfolded late last month:
So considering what happened today, do note what the above-mentioned Jason Daw said headed into the Tuesday session…
CNY: beware another funding squeeze
After engineering (another) epic squeeze in late May/early June, overnight points have dipped into negative territory, 1m points are near five-year lows, the 430pm CNY closing price is back to a discount to the fix, and USD-CNH is rising again.
While intervention can (temporarily) relieve depreciation pressure, it does provide good entry levels for short-term speculative long dollar risk and better entry points for locals to buy dollars. The game is not sustainable with latent capital outflow pressures, but the authorities have lots of bullets.
Given the level of points and the spot-fix gap, it is dangerous to get long dollars at these levels in any meaningful size. Another squeeze could be forthcoming, especially given the desire to protect downside risks to financial assets ahead of the People’s Congress in the autumn.