China Bonds, Yuan Plunge As PBOC Skips Liquidity Ops, Weakens Fix

Following Monday's State Council meeting which appeared to signal China entering a new easing phase...

As Bloomberg notes, greater fiscal spending and softer regulatory measures are now being added to looser monetary conditions. Key takeaways from Monday's statement:

Domestic demand is being elevated in importance. Fiscal spending will be accelerated, with a number of new projects to be rolled out. Boosting domestic demand was placed ahead of economic restructuring in the statement, unlike in April when it appeared only as a supplementary policy to restructuring.

Policy makers appear to be giving up on some of the targets of the deleveraging campaign. The State Council has asked the PBOC and MOF to meet "reasonable" financing needs from local financing platforms, in another step of loosening regulatory control, after allowing public funds to buy some substandard credit assets last week.

But, PBOC has decided to skip liquidity operations tonight and lower the Yuan Fix.

Offshore Yuan broke 6.84/USD for the first time since June 2017 after China’s central bank slashed its daily reference rate for the yuan by 0.44% to 6.7891 per dollar, the lowest level since July 2017.

As U.S. blogger Ye Xie says, the yuan should stabilize once easing is done. But that moment is unlikely to come any time soon. China will reportedly keep its monetary policy loose in 2H which means the big round number of 7 may soon act as a psychological magnet for USD/CNY traders.

And 10Y China bond yields spiked 7 bps to the highest in a month...


For now, it appears delevering or no-delevering, the capital outflows are accelerating...

“The expectations for easing are getting stronger," said Gao Qi, Singapore-based foreign exchange strategist at Scotiabank.

"The PBOC may issue verbal intervention to support the yuan soon, if the onshore currency follows the offshore rate to slide quickly. But any intervention will not reverse the trend for the yuan.”

We are sure Mnuchin et al. are watching intently.