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)
Messaging: winni.zhou.thomsonreuters.com@reuters.net)) 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.
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