CNH: What’s behind the recent big move? – Danske Bank

Research Team at Danske Bank suggests that while transparency is low behind the recent CNH move at the start of the month and presents their take on the move below.

Key Quotes

‘China has been very concerned about rising outflows and feared an acceleration in January as many – including ourselves – have focused on the resetting on 1 January of the USD50,000 quota that all Chinese citizens can buy every year as long as the use of the money does not violate the capital control rules.”

“It seems that China has tried to act pre-emptively and put a stop to the depreciation of CNY versus USD, as this could risk fuelling more outflows – as was the case in January last year. China’s best weapon to stop depreciation is intervention in the offshore market and to tighten liquidity. This pushes up offshore money market rates and thus the cost of shorting CNH.”

“As many hedge funds and other investors have been short CNH going into 2017 on the expectation that outflows could pick up, we believe there has been a big short position in the market that has been squeezed by the rise in the cost of selling CNH. As these investors scramble to close positions, demand for CNH is moving up and is pushing money market rates up even more. It also pushes more investors to run for the door in the trade.”