CNH: Money Market Developments Influence Offshore Renminbi

CNH: The battle for funding

The offshore renminbi, the CNH, is starting to find some support and this largely looks down to developments in money markets. While the Chinese currency has been seen as a popular funding currency this year, it looks like Chinese authorities might be trying to intervene in money markets to make funding more expensive.

For example, one-month CNH implied yields are now 5.20% – the highest level since late 2018. The strategy here seems to be activity in short-dated CNH swap markets on the view that CNH rates can be more easily influenced than onshore rates since the stock of CNH cash is so much smaller than the stock of onshore cash.  Equally, the People's Bank of China (PBoC) open market operations seem to be draining CNH liquidity. For example, the rollover of 6-month offshore PBoC bills on 19 September will result in a CNH10 billion drain in liquidity.

PBoC activity to drain CNH liquidity and support the currency is clearly incongruous with broader monetary easing to support the economy. This means that USD/CNH will probably not sell off that much further. But the strategy looks one of buying time until the major dollar trend turns, which may occur in the fourth quarter of this year.