Reading the Yuan tea leaves

Correction to previous market note

Should read

With President Trump's latest tweets sounding like things are about to re-escalate considerably, no one wanted to be caught short USDCNH  Fixed Income or Gold heading into a weekend fraught with the potential G-7 headline risk.

Everyone is trying to figure out when to fade the move today!! 

There's been profit-taking interest in USDCNH from local names around 7.16/17 with the move higher.  Moreover, a lot of the Interbank community is squaring a chunk of their long USD positions this morning, and likewise.

I think one of the issues facing currency trader is that after Friday they are likely "bar belled" on USD risk long Euro on currency war FOMO  but long  USDCNH on trade war risk. Big move on the CNH makes for an excellent time to book some earlier than expected profit. I don't have a strong view one what of the other so when in doubt I decided to get out but looking to reload  on dips below 7.14 -15 

While I think it's still too early to give up on the Yuan moving to 7.20 +, the increasing threat of USD intervention needs to be respected.

And after the fix, PBOC SETS YUAN MID-POINT AT 7.0570 / DLR VS LAST CLOSE 7.0979 9 its is now clearer the Pboc is trying to temper Yuan weakness for fear of capital outflows, so we now have to keep close tabs on funding conditions to see if the Pboc are making their best efforts to quash currency speculators.

USDCNH swaps are trading offered into the MLF roll (expected at 0945 HKT), with 1y trading at +720 from a high of +800. The market may want to close the gaps in spot and swaps, but both should remain bid on dips.

Regional central banks are expressing their displeasure with the weaker Yuan. Korea's Finance Ministry says steps will be taken in FX if the market becomes unstable; not desirable for KRW to move excessively on the Yuan. (Bloomberg) Korea's Finance Ministry says steps will be taken in FX if the market becomes unstable; not desirable for KRW to move excessively on the Yuan. (Bloomberg) The Pboc allowing the Yuan to weaken hasn't exactly endeared themselves to regional Asian central banks who were preparing to release a dove of their own and assist struggling domestic economies as it offers them less policy wiggle room due to the negative knock-on local currency effect from the weaker Yuan.