Forex
PBOC increases offshore yuan bills issuance to stabilize currency
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© Reuters.
The People’s Bank of China (PBOC) plans to issue a larger batch of bills in an effort to stabilize the weakening yuan, according to state media Financial News on Thursday. This move follows the central bank’s announcement of ramping up bill sales in Hong Kong next week.
The PBOC intends to sell CNY 15 billion (HK$16 billion) worth of six-month yuan-denominated bills next Tuesday, marking the largest auction for such a tenor since it began selling offshore yuan bills in 2018. This sale significantly surpasses the CNY 5 billion of six-month bills set to expire next week.
The decision to sell bills in the financial hub is expected to drain yuan liquidity from the market and help stabilize the currency’s exchange rate. This comes after the yuan’s three-month interbank rate in Hong Kong rose to 4.23%, and the one-month tenor climbed to 4.79%. The overnight rate exceeded 5% for the first time since April 2022, moving closer to the comparable borrowing costs for the US dollar.
As a result, traders will find it more expensive to borrow Chinese currency in overseas markets and sell it against the US dollar. The has risen 46 basis points this week, reaching a new high of 7.2789 per US dollar.
In addition to these measures, early mortgage repayments have been reduced, a move cited by an unnamed senior official as a potential booster for consumer confidence. The PBOC plans to increase its coordination with fiscal and industrial policies while closely monitoring the effects of financial policies.
This marks the second batch of offshore Chinese yuan notes issued by PBOC in the past month with an aim to stabilize the Chinese yuan. On August 22, PBOC had announced issuing CNY 35 billion worth of central government bills in Hong Kong, with CNY 20 billion of them being three-month notes. This year, the central bank has issued nine batches of bills in Hong Kong totaling CNY 110 billion ($15.1 billion).
The larger issuance of central government bills is expected to moderately tighten the Chinese yuan liquidity in the offshore market and increase the cost of shorting the yuan. The offshore yuan Hibor, a gauge that measures offshore yuan liquidity conditions, had risen 51 basis points to 4.44% on September 12, the highest since April 2022. The three-month offshore yuan Hibor rose 24 basis points to 4.11%, the highest since 2018.
The PBOC’s issuance of offshore central notes and tightening of the yuan liquidity are intended to stabilize the exchange rate and avoid irrational fluctuations in the market. If there continues to be depreciation pressure on the offshore Chinese yuan exchange rate in the future, PBOC may further regulate the offshore yuan liquidity by issuing additional central bills.
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Forex
Major Russian lenders say yuan coffers empty, urge central bank action
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By Elena Fabrichnaya
MOSCOW (Reuters) – Major Russian banks have called on the central bank to take action to counter a yuan liquidity deficit, which has led to the rouble tumbling to its lowest level since April against the Chinese currency and driven yuan swap rates into triple digits.
The rouble fell by almost 5% against the yuan on Sept. 4 on the Moscow Stock Exchange (MOEX) after the finance ministry’s plans for forex interventions implied that the central bank’s daily yuan sales would plunge in the coming month to the equivalent of $200 million.
The central bank had been selling $7.3 billion worth of yuan per day during the past month. The plunge coincided with oil giant Rosneft’s 15 billion yuan bond placement, which also sapped liquidity from the market.
“We cannot lend in yuan because we have nothing to cover our foreign currency positions with,” said Sberbank CEO German Gref, stressing that the central bank needed to participate more actively in the market.
The yuan has become the most traded foreign currency on MOEX after Western sanctions halted exchange trade in dollars and euros, with many banks developing yuan-denominated products for their clients.
Yuan liquidity is mainly provided by the central bank through daily sales and one-day yuan swaps, as well as through currency sales by exporting companies.
Chinese banks in Russia, meanwhile, are avoiding currency trading for fear of secondary Western sanctions.
At the start of September, banks raised a record 35 billion yuan from the central bank through its one-day swaps.
“I think the central bank can do something. They hopefully understand the need to increase the liquidity offer through swaps,” said Andrei Kostin, CEO of second-largest lender VTB, stressing that exporters should sell more yuan as well.
The acute yuan shortage also follows months of delays in payments for trade with Russia by Chinese banks, which have grown wary of dealing with Russia after U.S. threats of secondary Western sanctions. These problems culminated in August in billions of yuan being stuck in limbo.
Russia and China have been discussing a joint system for bilateral payments, but no breakthrough is in sight. VTB’s Kostin said that since Russia’s trade with China was balanced, establishing a clearing mechanism for payments in national currencies should not be a problem.
Forex
Bank of America sees more downside for the dollar
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Investing,com – The US dollar has stabilized after a sharp fall in August, but Bank of America Securities sees more troubles ahead for the US currency.
At 07:20 ET (11:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 101.077, having largely held its course over the last week.
That said, the US currency is still down 1.6% over the month.
The dollar’s selloff last month stood out in a historical context, according to analysts at Bank of America Securities, in a note dated Sept. 5.
The greenback has since stabilized, however, despite the outsized weakness, the US bank still sees three reasons to stay bearish on the Dollar Index (DXY).
Following similar episodes of bearish DXY breakouts, the index has tended to continue its downtrend, the bank said.
In the last 3 analogs, DXY index fell on average for another 4% before reaching a bottom. Extending this analysis to bilateral USD/G10 pairs suggests a continuation of the USD downtrend is more likely vs EUR, GBP, and AUD than SEK, NOK, and CHF in G10.
While the DXY made a new year-to-date low in August, broad nominal and real USD trade-weighted indices have stayed at Q4 2022 levels and would suggest the USD remains overvalued.
The USD selloff in 2024 has been concentrated in and other European currencies, leading to DXY divergence from other USD indices.
The bank also noted US 10y Treasury yield’s tendency to fall after the first Federal Reserve cut, while global financial conditions are set to loosen further.
“USD may see more weakness as other central banks, particularly the ones that cut policy rates ahead of the Fed, can now afford to let the Fed do some of their work and indirectly support global economies outside of the US,” BoA added.
Forex
Dollar’s demise appears overstated – JPMorgan
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Investing.com – The US dollar has had a difficult summer, dropping substantially during the month of August, but JPMorgan thinks those predicting the demise of the U.S. currency are getting ahead of themselves.
At 06:00 ET (10:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower to 101.127, having lost 1.6% over the course of the last month.
“Diversification away from the dollar is a growing trend,” said analysts at JPMorgan, in a note dated Sept. 4, “but we find that the factors that support dollar dominance remain well-entrenched and structural in nature.”
The dollar’s role in global finance and its economic and financial stability implications are supported by deep and liquid capital markets, rule of law and predictable legal systems, commitment to a free-floating regime, and smooth functioning of the financial system for USD liquidity and institutional transparency, the bank added.
Additionally, the genuine confidence of the private sector in the dollar as a store of value seems uncontested, and the dollar remains the most widely used currency across a variety of metrics.
That said, “we are witnessing greater diversification and important shifts in cross-border transactions as a result of sanctions against Russia, China’s efforts to bolster usage of the RMB, and geoeconomic fragmentation,” JPMorgan said.
The more important and underappreciated risk, the bank added, is the increased focus on payments autonomy and the desire to develop alternative financial systems and payments mechanisms that do not rely on the US dollar.
“De-dollarization risks appear exaggerated, but cross-border flows are dramatically transforming within trading blocs and commodity markets, along with a rise in alternative financial architecture for global payments,” JPMorgan said.
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