HALISTER1: Inverted Offshore Yuan Curve Triggers Carry Trade Unwinding

Inverted Offshore Yuan Curve Triggers Carry Trade Unwinding

(Bloomberg) -- Unwinding of yuan carry trades is picking up as CNH liquidity tightens with the approach of yuan’s inclusion into SDR and ahead of national holidays from Oct. 1, analysts say.
  • “In the past when yuan liquidity was ample and overnight funding was cheap, market players entered arbitrage trades in the forwards market by borrowing short-term funds and then lending out long-term funds,” Becky Liu, senior Greater China rates strategist at Standard Chartered Bank says
  • “A lot of those positions were squared off when the CNH interest rate curve inverted last week, causing the market reaction to become even more severe.”
  • Overnight CNH Hibor drops to 12.135% versus 23.683% yesterday; it was 1.373% on August 31, still above;
    • One-week CNH Hibor at 7.984% and 1-month Hibor at 6.008%
  • “Global markets external risks are increasing this week, and while we expect the Fed to raise rates in Dec., we cannot rule out a rate hike this month,” Cheng Shi, Head of Research at ICBC International Research says.
    • “PBOC probably is tightening yuan liquidity to prepare for this small likelihood.”
  • “Yuan depreciation expectations were too strong after the G-20 meeting and from PBOC’s perspective it needs to control the pace of yuan depreciation, containing the currency within 6.7,” Harrison Hu, chief Greater China economist at RBS says. “In the near term, yuan remains on the path of devaluation, which will inevitably affect the pace of yuan internationalization.”
  • Hong Kong’s yuan deposits has shrunk 33.5% from a peak of 1 trillion yuan ($149.9b) to 667b yuan amid depreciation pressures, according to HKMA data
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Becky Liu (Standard Chartered PLC)
Cheng Shi (Industrial & Commercial Bank of China Ltd)
Harrison Hu (Royal Bank of Scotland Group PLC)

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