Published at 02:26 (GMT) 26 Jan

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USD/CNY 1Y NDF continues to hold steady around the 6.6250 mark at the open this morning, not showing much life despite expectations of further tightening measures from China. Range trading seen for now between 6.6000-6.6500 and out of this range for a clearer bias. Helping to quell fears of a mark drawback in loans, PBOC official Su Ning said yesterday that loan growth will be reasonably sufficient to cement recovery and reiterated the 'moderately loose policy' bias. Even though the market is expecting a resumption of CNY appreciation sometime this year, albeit at a gradual pace, the NDF market has in fact gone the other way, pricing in less than 3% appreciation in the next 12 months.

PBOC has been using the weekly 3M and 1Y auction yields as a signal of policy intent and urgency to drain liquidity from the system. As such, keep an eye on the 1Y bill auction rates today. China sold CNY24bn last week at 1.9264%, +8bp from the previous week. China auctions the 3M bills on Thursdays. Historically, higher 3M and 1Y yields point to hikes in either the reserve requirement ratio (which we've already seen and more expected to follow) and the official 1Y lending rate. A larger than expected rise in the 1Y rate today may also have an adverse reaction on investor risk appetite.