CNH Hibor rates fell back on Tuesday showing the first sign of normalisation following the spike last week and on Monday. The one-week CNH Hibor rate declined to 7.98%, from 12.45% yesterday, which was the highest level since the capital outflows in Q1. However, the one-year fell only marginally to 4.49% on Tuesday, from 4.51%.
The decline in CNH Hibor rates is in line with our expectation that the increase in money market rates related partly to increased demand from the Mid-Autumn Festival last week (see FX Strategy: Spike in CNH money market rates set to be temporary , 14 September). We expect CNH Hibor rates to normalise over coming weeks. It may happen gradually, though, as the unexpected spike in the cost of short-term funding is likely to have caused some anxiety and potential hoarding of liquidity in the short term.
The cost of hedging receivables has come down a bit in the past few trading days but is still on the high side compared with the summer months. We expect it to come down further over the next couple of weeks, so it may postpone a little further any need for hedging.
As we look for continued CNY and CNH weakening in the medium to long term we continue to recommend hedging of receivables on a structural basis. On Friday, we revised up our 12-month USD/CNY forecast to 7.1 (currently 6.67), mainly because time is running and we roll our forecast of continued weakening into the future (see FX Forecast Update , 16 September, page 19). For EUR/CNY, we now look for 8.38 in 12 months, which is 6% weaker than the 12M forward rate.
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