While checking across a number on Chinese charts this morning what I saw made me think and potentially reassess the outlook.
Since this large down move in the Chinese 2-year yield, we have a total of only 8 separate weeks where yields closed higher. The largest weekly up close being 4 basis points
Last week it closed up 19 basis points and posted a strong outside week at the trend low (lowest level in data going back to 2016) causing a huge flattening of the 2's 10's curve
Back in 2020 we did something very similar (although not as aggressive as we did not have the outside week). At that point USDCNH (just like now) was testing the trend high. It failed to make that break and that ended up being a turning point for it to move lower over the following months as the 2-year yield kept moving higher and the curve kept flattening.
I have been articulating in recent weeks that we looked ready to make a break of the 7.3680-7.3750 area, BUTthis chart is giving me pause for thought.
Back in 2019-2020 we had 2 tops at exactly 7.1965 before we turned. This time we have seen a high in Sept 2023 at 7.3682 and a high this year at 7.3695. Today we hear that The PBOC pumped a net 958.4 billion yuan ($131 billion) of short-term cash into its financial system, the second highest on record.
Could we still break this 7.3680-7.3750 range on USDCNH- yes of course we COULD...but this chart now questions whether we will.
The weekly chart on USDCNH is also starting to look in danger of forming an evening star formation - That would look more compelling IF we were closer to 7.30 by the end of the week.
The other question in this scenario is what, if anything, does it mean for the USD overall/
Looking at the overlay of USDCNH and the BBDXY Index (Which has CNY as a part of it) we clearly see that the USD moved a lot lower in tandem with the USDCNH move
The prior move higher had been around 9% over about 11 weeks in the BBDXY compared to about 9% over about 16 weeks this time.
Obviously back then US yields were at the lows of a sharp down move although the US10-year yield did drift higher in that period. So, it is not as much a given that a turn here would also turn the USD, but it is food for thought.
It is still possible that we see USDCNH break this level but not as "compelling as even a week ago so at a minimum it is not a time to be complacent about this USD move and a more defensive approach might be appropriate while we see how this plays out.
