Capping USDCNH with a higher CNH Hibor; UST yields bounce off support

Capping USDCNH with a higher CNH Hibor; UST yields bounce off support
Philip Wee, Eugene Leow17 May 2019
    Photo credit: AFP Photo

    FX: Capping USDCNH with a higher CNH Hibor
    USDCNH is likely to be capped at 7 ahead of the Xi-Trump meeting at the G20 Summit on June 29-29. This week’s spike in 1M CNH Hibor when USDCNH hit 6.90 was reminiscent of efforts in August 2018. At that time, rates had spiked to curb the speculative attacks on the yuan a month after the first US tariffs hit USD50bn of Chinese goods. This time around, 1M CNH Hibor need not rise to last October’s high (7.1%) to steady USDCNH around 6.90. In contrast to the rate hikes last September and December, the Fed has shifted to a pause stance with a dovish tilt. Assuming the Xi-Trump meeting takes place next month, no one expects a trade deal, if any, to roll back existing tariffs but to hold off Trump’s threat to hit a 25% tariff on the remaining USD325bn of Chinese goods.
    Rates: UST yields bounce off support     

    Overnight, US 10Y and 30Y bounced off their respective lows of this year at 2.36% and 2.80% respectively. The decoupling between yields and US stocks since trade tensions escalated in the first week of May is disconcerting. Shorter-term USD rates appear to be pricing in close to three cuts by end-2020, an event that is likely only if the US economy slows (no signs of that yet) or if the stock market crashes (15-20% decline in the S&P 500). With the S&P 500 resilient (just 2% off its all-time high), there is insufficient justification for the Fed to ease policy. It might require an all-out trade war to prompt a significant selloff in equity markets. In any case, we maintain that USD rates are rich at current levels and it is better to avoid duration risks.

    The relentless fall in European Government Bond (EGBs) yields bears watching. In particular, 10Y German yields are at -0.1%, just shy of the all-time low of -0.2% registered in mid-2016. Persistently weak Eurozone data is probably to blame with market participants extrapolating that easy monetary policy is here to stay. Yields can push deeper into negative territory (the -0.4% deposit rate is probably a hard constraint) and we cannot see any meaningful rise in German yields unless fiscal spending picks up. Generally depressed EGB yields will probably limit upside to US yields for the foreseeable future.

    Philip Wee

    FX Strategist - G3 & Asia

    Eugene Leow

    Rates Strategist - G3 & Asia


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