11 Jan 2016
CNH-CNY dynamic brews trouble ahead - TDS
FXStreet (Guatemala) - Analysts at TD Securities explained that China continues to leave the EM community puzzled if not worried.
Key Quotes:
"The CNY fixed marginally stronger at 6.5626 today, following Friday also stronger on the prior day. However, spot trading on Friday and the previous streak of 8 consecutive weaker fixes suggests that onshore problems are not gone.
The offshore renminbi responded strongly with a 1.2% rally today as USDCNH has fallen back to 6.60, at the time of writing. This is just 0.5% higher than levels at the start of the year.
That said, the CNH rally has been supported by a huge upside move in implied yields, with TN rates at some point trading above 70% (yes, that’s right, seventy percent!), while 3m and 12m have been trading higher throughout the session and currently stand at 9.7% and 5.5%, respectively, which makes it virtually impossible to short the currency while local authorities are willing to keep these dislocated funding levels in place.
The result is that investors who want to take a more negative view on China and look to price in more RMB weakness down the road may resort to selling the underlying assets rather than shorting the currency, or short proxy currencies such as TWD. So the CNH-CNY dynamic may look positive on the surface, but there are deeper troubles brewing underneath, which may eventually expose EMs to more risk aversion in the coming days."
Key Quotes:
"The CNY fixed marginally stronger at 6.5626 today, following Friday also stronger on the prior day. However, spot trading on Friday and the previous streak of 8 consecutive weaker fixes suggests that onshore problems are not gone.
The offshore renminbi responded strongly with a 1.2% rally today as USDCNH has fallen back to 6.60, at the time of writing. This is just 0.5% higher than levels at the start of the year.
That said, the CNH rally has been supported by a huge upside move in implied yields, with TN rates at some point trading above 70% (yes, that’s right, seventy percent!), while 3m and 12m have been trading higher throughout the session and currently stand at 9.7% and 5.5%, respectively, which makes it virtually impossible to short the currency while local authorities are willing to keep these dislocated funding levels in place.
The result is that investors who want to take a more negative view on China and look to price in more RMB weakness down the road may resort to selling the underlying assets rather than shorting the currency, or short proxy currencies such as TWD. So the CNH-CNY dynamic may look positive on the surface, but there are deeper troubles brewing underneath, which may eventually expose EMs to more risk aversion in the coming days."