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Global markets turned weaker on Wednesday after a hawkish FOMC statement heightened the chances of a rate hike in June. US dollar rallied against most of the majors, with the dollar index trading above the 95 level. Dollar is likely to continue appreciating with focus on UK retail sales for the day.
The USDCNY fixing rate reached the highest level since early February. This clearly hints that China wants to release the pressure on CNY via managing the fixing rates.
In the meantime, it appears that the central bank also sells USD in both CNY and CNH market to contain the expectation of a large CNY depreciation.
The onshore bond market, however, has been suffering from this strategy as PBoC’s intervention will naturally withdraw CNY liquidity from the inter-bank market.
In the meantime, following USD softness, CNY has weakened somewhat against the basket of currencies. Hence, it is recommended to stay long in 2M USD/CNY forwards.
