China c.bank could cut FX reserve ratio to ease dollar funding strains

Kitco Media
By Reuters
Published:
Updated:
Reuters
SHANGHAI, March 10 (Reuters) - China's central bank could cut the amount of foreign exchange reserves that banks must hold to ease dollar funding strains, analysts said on Friday, as expectations of aggressive hikes in U.S. interest rates worsened liquidity conditions. Hawkish comments from U.S. Federal Reserve Chair Jerome Powell suggested U.S. interest rates could go higher for longer, prompting global funds to pile into dollar-denominated assets. "Market attention should be on tight onshore dollar liquidity," analysts at ANZ said in a note. "In this case, a cut in the reserve requirement ratio (RRR) for foreign currencies will be more likely than (for) the yuan in the near term." The overnight dollar borrowing cost in the onshore interbank market is trading at a premium of nearly 10 basis points to the SOFR , a Libor replacement preferred by the Fed, having risen above it since February. "It is necessary to cut FX RRR to ease the tensions," said a trader at a Chinese bank. Tighter yuan liquidity exacerbated the situation, according to Industrial and Commercial Bank of China (ICBC). "In order to fulfil the yuan demand, some institutions chose to use FX swap tools to acquire local currency liquidity," ICBC said in a post published on China FX trade system's (CFETS) official WeChat account.


The widening yield gap between China and the United States encouraged market participants to swap near-end dollars for yuan at a lower cost. The dollar/yuan swap curve stayed in negative territory, with the one-year rate hitting a 2-1/2-month low of -2,167 points on Thursday. China's central bank made its biggest weekly cash withdrawal in more than two months this week, with some investors expecting a reduction to banks' reserve requirements soon. Separately, a cut to the FX RRR could relieve yuan depreciation pressure, as the local currency traded not far from the psychologically critical 7-per-dollar level. The PBOC previously adjusted the FX RRR in September to rein in a sliding yuan and make it less expensive for banks to hold dollars. (Reporting by Winni Zhou and Brenda Goh; Editing by Simon Cameron-Moore)

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