China: CNH rates flying high - Rabobank

Michael Every, Head of FMR at Rabobank, suggests that 2017 has already started to generate fireworks as yesterday China’s overnight rate for CNH deposits surged to 66%, almost as high as it achieved in exactly the same short-squeeze action back in January 2016: today it is 105%.

Key Quotes

“We have already seen CNH rally all the way back to 6.80 this time round as a result. Of course, following that same glove slap from the PBoC, in 2016 CNY knee-jerk rallied from 6.60 to 6.45…before slumping all the way to 6.96. At the same time, over the course of 2016 to September last year foreign holdings of CNH dropped 12%.”

“In other words, China can prevent people shorting its currency; or at least it can keep doing that as long as its still-large FX reserve pile lasts. However, it can’t do that and expect normal financial market activity; or anyone outside China to take CNH seriously as a FX reserve currency. In short, we can surely still expect 2017 to be a replay of 2016, where the PBoC took an early 1-0 lead against the run of play, but the Markets United eventually still won 3-1 (down 150 pips then up 500).” 

“On which note, a far more sensible policy to support CNY would be to stop the silly-money flow of Chinese investment into European football clubs, which may now be about to cease based on reports this morning. But talking of clashes, this morning also saw the headline “China said to mull scrutiny of US firms if Trump starts feud”: is this all about to really kick off? If so, could we even see nasty fouls and red cards? Might there even be a pitch invasion and/or serious crowd violence?"