The Asian FX Strategy Team at Nomura notes that the rise in CNH funding costs since 8 September has led to higher CNH rates and some unwinding of long USD/CNH positions, although they dont' expect current conditions to be sustained for a prolonged period.

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Based on our analysis, we believe current conditions are unlikely to be sustained for a prolonged period, but because of events ahead, the recent squeeze is likely to last longer than that of January 2016. That said, we continue to believe CNH will depreciate in the medium term (vs USD and on a trade-weighted basis) because of what is likely to remain a challenging balance of payments backdrop into 2017. On CNH rates, our medium-term view is for lower yields on CNH CGB and CCS.

Although it is difficult to judge the duration and possible intensity of the current CNH liquidity squeeze, we believe that it is unlikely to be of the same intensity as January 2016, but could be slightly longer in duration. Our view that the intensity is unlikely to be as severe is based on several reasons.

There have already been CNH liquidity injections from the HKMA, suggesting that even if funding remains relatively tight, it may be limited by further HKMA action (if needed). In January 2016 CNH HIBOR surged and the HKMA’s eventual action helped to stabilise CNH liquidity.

In addition, the January 2016 CNH funding squeeze, where the overnight CNH HIBOR fixing hit a peak of 66.8% (12 January), is also less likely to emerge this time as short RMB positioning is significantly lighter. During January 2016 when short RMB positions were extreme, the offshore/onshore spot USD/RMB basis hit a high of +1441pips (6 January 2016).

Currently, onshore/offshore spot basis is around +40pips, but has been relatively stable or only slightly elevated at +118 pips on 8 September, when CNH liquidity started to tighten. Other indications of relatively light CNH positioning beyond our discussions with market participants, include the deviation of spot CNY and CNH from the USD/CNY fix, which were last around -28bp and -15bp, respectively (+7bp and +25bp respectively on 8 September).