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Tighter Chinese liquidity conditions backed a bid in short CNY swaps on Thursday binary worksheet. A continuation of this pressure is expected to drive flattening pressure across the 2s/5s slope into the end of the quarter. Meanwhile, Nomura has outlined a short-end CNH IRS trade idea, Moody’s expects China’s credit ratings to withstand the rebalancing challenge and the UK has tightened its CNY trading ties, writes Deirdre Yeung of Total Derivatives.

China’s seven day repo rate fixed 11bp higher on Thursday, at 3.18%, despite the People’s Bank of China (PBoC) making a Rmb15bn ($2.4bn) net injection of funds into the system on the same day.

A dealer said the fixing uptick was driven by increasing demand for cash as the quarter-end approached. “Anything below 3.5% is still a reasonable level,” he said.

In the swap market the short end has been subject to better paying interest, partly a reflection of liquidity concerns and the impact on the fixing.

However, a relatively upbeat assessment issued by the US Federal Reserve overnight was another supportive factor usd aud chart. A market source said that a solid bid had driven flow across the two to five year sector of the swap curve.

Two year swaps traded up to 3.55%, 5bp higher than on Wednesday. The short end, where the fixing has a greater impact, has underperformed and the 2s/5s curve slope has flattened by 0.25bp to 34.75bp.

The source added that liquidity conditions were likely to deteriorate further over the next week. This should in turn drive further curve flattening pressure. “2s/5s could flatten down below 30bp," he suggested usd to myr exchange rate. However the source predicted that a move to that level would be likely to trigger profit-taking on flatteners.

In a strategy piece released earlier this week Nomura suggested that reform of the Shanghai Free Trade Zone (FTZ) would push short rates higher over the medium term fx rate gbp to usd. The proposed reforms raise the probability of offshore financing for firms in the FTZ. This would drive convergence between onshore and offshore rates and be a major step towards capital account liberalisation.

Improving prospects for the transfer of capital within the FTZ is thought to have backed demand for CNH from players looking to access the lower funding levels available offshore call option price formula. This demand for CNH has pushed HIBOR fixings higher.

Nomura said the move in CNH HIBOR should push CNH CCS and CNH IRS higher over the medium term. “Short-dated CNH CCS may fluctuate with CNH spot, where dips can be seen as buying opportunities," the analysts wrote.

"We note that recent lower-than-expected USD/CNY fixings in early June have seen both CNY and CNH forward points drop, and therefore lower CCS CNH across the curve. However, CNH forward points and CCS CNH have quickly rebounded even if USD/CNH has been relatively unchanged."

As such, the bank favours higher CNH CCS as a convergence theme. This could also be expressed by paying one year or two year CNH (3m HIBOR) IRS.

Nomura warned, however, that a surge in CNH deposits would be likely to exert downward pressure on CNH NDF points and CCS (albeit only temporarily).

Moody’s Investor Services said earlier this week that China’s Aa3 rating and stable outlook were “underpinned by the country’s macroeconomic strengths as well as by its fiscal and external cushions” usa today sudoku answers. It added that it expected the nation’s credit standing to withstand “rebalancing challenges”.

Explaining its rebalancing comments, Moody’s said: “The success of policy measures will be critical for China’s ability to negotiate successfully the challenges which lie ahead. To that end, the government’s unfolding policy approach that favours long-term stability over short-term growth provides support to China’s sovereign credit profile.”

Moody’s forecasts that China’s GDP growth rate will be in the 6.5%-7.5% range this year and next binary hex converter. It said the key issues for the long-term growth outlook would be credit tightening and structural reform.

As far as ratings risks are concerned, Moody’s said upward pressure was likely if China were to receive a growth dividend from the advancement of the reforms outlined by the government’s Third Plenum in November 2013.

On the other hand it warned of potential downward pressures linked to a sharp slowing in the economy. This, it added, could be driven by “a disorderly unwinding of systemic leverage, a collapse in the property market or a significant deterioration in government finances from a large, material crystallisation of contingent liabilities.”

The maiden visit of Chinese Premier Li Keqiang to the UK this week has been heralded as a major step in making London a CNY trading hub Europe decimal worksheets. China Foreign Exchange Trade System (CFETS) said on Wednesday that CNY and GBP would become directly exchangeable from Thursday, without using USD as an intermediary.

CNY was already directly tradable against USD, JPY, AUD, NZD, CAD, RUB and MYR. HSBC said it had received PBoC approval to be among the market makers for the new currency pair.

The news came amid a flurry of activity in London, with China Construction Bank confirmed as the official RMB clearing bank for London, separate agreements being signed between the London Stock Exchange and both Bank of China and Agricultural Bank of China, and a new initiative by the UK’s export credit agency to back RMB-denominated funding (see here for full GlobalRMB coverage).

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Every year, our sister publication Asiamoney carries out an Offshore RMB Poll. As part of that process, the magazine asks the market for its thoughts on important renminbi topics. In this third year, we received around 2,300 valid responses, up 3% on a year ago. The ten questions included a new one on the inclusion of onshore RMB assets in global indices future stock market crash. Here we present the answers to the first five questions.

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