Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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CNH: China Authorities Loosening their Grip, But Devaluation Unlikely
Charu Chanana
Chief Investment Strategist
Key Points:
- Chinese yuan has depreciated to its lowest levels since November.
- Chinese authorities have allowed the yuan to weaken by fixing the midpoint for onshore yuan weaker
- Reports of bond buying by the Chinese central bank have also underpinned, as these could signal the start of quantitative easing
- Broader easing measures are still likely to be delayed until the Fed easing begins
- Chinese authorities are unlikely to let yuan weaken steeply with trade tensions rising
- But USDCNH has shifted to a higher trading band, and yuan's direction remains tilted towards that of weakness
China’s economic pressures have continued to deepen, with the housing market struggling, and manufacturing falling short of expectations. The central bank policy stance has also remained accommodative, while most other central banks have been tightening policy.
Still, the yuan has not weakened significantly this year. The onshore yuan has weakened by just over 2% against the USD year-to-date, compared to an over 10% decline in the Japanese yen, a 7% decline in the Korean won and a 5% drop in the Taiwanese dollar.
This is because the central bank has maintained a firm grip on the yuan with its daily fixings. The central bank sets the onshore spot midpoint daily and allows it to trade within a +/- 2% range from that level. The offshore yuan (CNH) also closely follows the onshore yuan, although it has traded above the band for much of this year.
Today’s onshore spot midpoint fixing was the weakest since November, with the USDCNY midpoint at 7.1192. This might indicate that the People's Bank of China (PBoC) is willing to let the yuan weaken further to manage depreciation pressure. This has pushed onshore and offshore yuan to their weakest levels since November.
Reports of quantitative easing are also adding to the pressure, with reports suggesting the PBoC might buy its own bonds. However, Pan Gongsheng, the governor of the PBoC, dismissed the idea that this bond trading is a form of massive monetary easing, describing it instead as a liquidity management tool.
Chinese authorities are likely to remain cautious about sudden yuan weakness or devaluation to avoid being tagged as currency manipulators, especially as export restrictions from the US and Europe increase.
Still, market participants are positioned to weaken the yuan at the slightest sign of China expanding its easing measures or loosening its grip on fixings. The yuan's direction remains clear, although the pace of depreciation is likely to be measured. For now, the trading band for USDCNH has likely shifted higher.
Disclaimer:
Forex, or FX, involves trading one currency such as the US dollar or Euro for another at an agreed exchange rate. While the forex market is the world’s largest market with round-the-clock trading, it is highly speculative, and you should understand the risks involved.
FX are complex instruments and come with a high risk of losing money rapidly due to leverage. 65% of retail investor accounts lose money when trading FX with this provider. You should consider whether you understand how FX work and whether you can afford to take the high risk of losing your money.
Recent FX articles and podcasts:
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19 Jun: CHF: Temporary Haven Flows Unlikely to Fuel SNB Rate Cut
18 Jun: GBP: UK CPI Details and Elections Will Keep BOE on Hold
13 Jun: BOJ Preview: Tapering and Rate Hike Talk Not Enough to Boost JPY
- 10 Jun: EUR: Election jitters and ECB rate cut add to downside pressures
- 30 May: JPY: Intervention fears clash with carry trade attractiveness
- 29 May: AUD: Hot inflation reaffirms rate cuts remain some way off
- 15 May: AUD: Tailwinds to stay despite Budget impact
- 7 May: AUD: RBA fails to meet the hawkish expectations
- 3 May: JPY: Staying on intervention alert
- 30 Apr: AUD: Retail sales miss questions RBA market pricing
- 26 Apr: JPY: Bank of Japan adds to reasons to stay bearish yen
- 25 Apr: JPY: Accelerated sell-off; can the BOJ halt yen's decline?
- 25 Apr: Thematic Podcast: Deciphering Asian forex interventions
- 23 Apr: GBP: What can drive the next leg lower?
- 18 Apr: JPY: Intervention alert, or a BOJ alert?
- 16 Apr: Chinese Yuan’s Double Whammy - Dollar Strength and Yen Weakness
- 9 Apr: CAD vulnerable as market underprices dovish Bank of Canada risks
Recent Macro articles and podcasts:
- 12 Jun: France Election Turmoil: European Equities Amidst the Upheaval
- 11 Jun: US CPI and Fed Previews: Delays, but Dovish
- 10 Jun: Macro Podcast: Nonfarm payroll shatters expectations - how will the Fed react?
- 3 Jun: Macro Podcast: It is a rate cut week
- 28 May: Macro Podcast: When speech trump numbers
- 12 Jun: France Election Turmoil: European Equities Amidst the Upheaval
- 11 Jun: US CPI and Fed Previews: Delays, but Dovish
- 10 Jun: Macro Podcast: Nonfarm payroll shatters expectations - how will the Fed react?
- 3 Jun: Macro Podcast: It is a rate cut week
Weekly FX Chartbooks:
- 10 Jun: Weekly FX Chartbook: US CPI and FOMC dot plot have a low dovish bar
- 3 Jun: Weekly FX Chartbook: ECB and Bank of Canada likely to cut rates
- 27 May: Weekly FX Chartbook: Fresh USD upside from hawkish bolts and trade threats
- 13 May: Weekly FX Chartbook: US CPI and US-China trade tensions on the radar
- 29 Apr: Weekly FX Chartbook: Fed’s hawkishness meets BOJ’s dovishness
- 22 Apr: Weekly FX Chartbook: Stretched USD strength is raising intervention alert
FX 101 Series:
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