China: Intervention In CNH Narrows CNH-CNY Spread
Danske Markets | Sep 11, 2015 01:48AM ET
A sharp move lower in the CNH rate indicates strongly that China has today intervened in the off-shore market. This is quite unusual as China mainly intervenes in the on-shore market (CNY), as has been the case lately. USD/CNH has declined today from 6.47 to 6.38 (at 14.20 CET), a decline of 1.4%.
China is intervening to narrow the spread between the CNH and CNY, which widened sharply following the FX reform announced on 11 August . This follows a specific goal to have the same rate for CNY, CNY reference rate and CNH, as this was a concrete request from the IMF for China to be accepted in the SDR. Whether China is included in the SDR will be decided at the end of the year.
For hedging purposes this strengthens the case for hedging through the CNH market as it limits the basis risk in the spread between CNY and CNH. This is in line with the expectations we outlined in the presentation: CNY reforms - What this means for Nordic Corporates , 4 September 2015.
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