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Quick update:
With the month end balance sheet seasonality now past, o/n repo rates in China have dropped back in the PBOC target range, though they remain somewhat elevated. This is to be expected as it shows some issues still remain, while month-end was the acute problem...
With the month end balance sheet seasonality now past, o/n repo rates in China have dropped back in the PBOC target range, though they remain somewhat elevated. This is to be expected as it shows some issues still remain, while month-end was the acute problem...
In HK, the overnight CNH interbank rate was also high relative to recent history, but significantly off its fever pitch from the previous fixing...
However, also in HK, a return of CNY/HKD correlation (inverse now vs positive, meaning flows btw China/HK vs correlated flows from the rest of the system) strengthened my conviction in this repo issue being connected to the HK/Euroclear '$ pipeline' discussed in my last post...
If you want the details for why this raises my conviction, there is some really great work by @JeffSnider_AIP on this going back several years where he explores these $ pipelines (tldr below). Huge thx and credit for laying it all out rly well!
https://talkmarkets.com/content/cny--tic--october-2020-or-2017?post=282218
https://talkmarkets.com/content/cny--tic--october-2020-or-2017?post=282218
Finally, Jeff brings up RRR which reminds me I forgot to mention it as a big 
signal to look out for. RRR cuts would signal Chinese banks cannot supply enough RMB liquidity to solve the repo issue given current USD x-rate and Euro-$ funding realities (despite backdoor help)...
signal to look out for. RRR cuts would signal Chinese banks cannot supply enough RMB liquidity to solve the repo issue given current USD x-rate and Euro-$ funding realities (despite backdoor help)...
Thus, PBOC may allow more leverage on reserves at the CB to make up for the shortfall, which would be alarming since it implies repo is still an issue and the HK/Euroclear pipeline isn't helping. Jeff also has a good primer on RRR, so linking that too: https://alhambrapartners.com/2017/10/02/aligning-china-to-the-deficient-dollar/
That's it for now, will keep posting on this as events unfold. So far have not seen much new besides what is laid out here (glad I caught those FX correlations tho 
) so also pls tag/lmk if you see something interesting not mentioned!
) so also pls tag/lmk if you see something interesting not mentioned!
