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13 Jan 2016
How sustainable is China’s RMB funding squeeze? - Nomura
FXStreet (Delhi) – Research Team at Nomura, suggests that there are concerns that the authorities may try to sustain the tight CNH liquidity conditions for a prolonged period to limit long USD/CNH positioning.
Key Quotes
“We currently do not expect this to be the case for several reasons:
• If the objective of the recent CNH intervention was to bring spot USD/CNH back towards onshore spot USD/CNY, then this has been achieved with the basis close to flat (+90pips as of 4:16pm SGT) versus an intraday high of around 1800pips on 6 January 2016.
• Intervention in recent history has also been temporary.
• Deteriorating liquidity could lead to more cautious lending. Currently, we do not expect the CNH liquidity squeeze to affect interbank market liquidity or HK corporate activity given that most local bank loans are denominated in HKD.
• If the current onshore-offshore yield gap remains elevated this could attract some onshore deposits to migrate offshore. Indeed, when the funding situation eventually stabilizes, we expect more demand for dim sum bonds considering their superior yield relative to onshore bonds.
• We also continue to believe that the medium-term goal of the PBoC is to allow for greater market determination of RMB. This is especially with the relatively sharp drawdown in headline FX reserves and the risk of a more rapid fall in the coming months if the PBoC allows its short FX forward book to mature.”
Key Quotes
“We currently do not expect this to be the case for several reasons:
• If the objective of the recent CNH intervention was to bring spot USD/CNH back towards onshore spot USD/CNY, then this has been achieved with the basis close to flat (+90pips as of 4:16pm SGT) versus an intraday high of around 1800pips on 6 January 2016.
• Intervention in recent history has also been temporary.
• Deteriorating liquidity could lead to more cautious lending. Currently, we do not expect the CNH liquidity squeeze to affect interbank market liquidity or HK corporate activity given that most local bank loans are denominated in HKD.
• If the current onshore-offshore yield gap remains elevated this could attract some onshore deposits to migrate offshore. Indeed, when the funding situation eventually stabilizes, we expect more demand for dim sum bonds considering their superior yield relative to onshore bonds.
• We also continue to believe that the medium-term goal of the PBoC is to allow for greater market determination of RMB. This is especially with the relatively sharp drawdown in headline FX reserves and the risk of a more rapid fall in the coming months if the PBoC allows its short FX forward book to mature.”