Sudden Dollar Shortage in China as Big Banks Buy

Here we go...

As if overnight, Mainland dollar liquidity is suddenly scare. The large banks previously providing dollar liquidity began buying dollars, a number of commercial banks also have bought dollars in the interbank market and the swaps markets.

Within a few days, the dollar / renminbi swaps rapidly declined, with one week and one-month swaps on Tuesday hitting a new two year low.
The big banks may be soaking up dollars now to smooth the pain of yuan depreciation later:
Many analysts said that this is the result of multiple factors, combined to create pressure, and the Federal Reserve to raise interest rates expected to heat up not unrelated, but also within the tight dollar liquidity factors; they also do not rule out large banks "ordered settlement," in order to smooth future RMB devaluation pressure.
The dollar is the hot trade:
"After the Fed rate hike expected to heat up, the dollar to appreciate nature, the dollar enchants everyone." A stock line trader said.
A Fed rate hike in June is a shock event, as is a potential Brexit:
Also head of foreign exchange trading firm, said there are two black swan event in June will affect the devaluation expectations: the Federal Reserve to raise interest rates in Europe and the British retreat. If, unfortunately, these two things have happened, and that will bring a great impact to the renminbi expected, the central bank should be prepared in advance ready ammunition.
With the market already on edge about a possible rate hike, a switch in central bank actions triggered a sea change:
And perhaps this is expected to manage the central bank to make its usual supply of dollar liquidity in the market, large banks reverse and repurchase dollars, but the market touched the nerve, triggering market dollar liquidity shortage anxiety.

"The first day (the dollar) is tight I thought it was random, doesn't matter, so the next day like this, three straight days, the psychological endurance is limited, anxiety rises, so we can only ... buy (foreign exchange) as much as possible." one commercial bank trader said.
The PBoC is also suspected of moving ahead of a potential depreciation:
However, the above trading company trading executives pointed out that the central bank intervention in the swap market has powerful chain of effects, use a small amount of capital to achieve a large result; on the other hand can stabilize market sentiment. In addition, the central bank also made a gesture, that it would not wait for devaluation

The reason that the interventions are short and long-term is the central bank's trading strategy is to use the least amount of ammunition to achieve the best results. Because once the black swan happens, devaluation expectations will be significantly enhanced, which leads to delayed settlement of foreign trade enterprises, foreign exchange deficit will widen further bank, which will further increase the expected devaluation, creating a vicious cycle.

Earlier, SAFE has repeatedly said at a news conference that there is sufficient policy instruments to deal with the normalization of the Fed's monetary policy.
The end of June is also a potential time for tight liquidity in China, and the news of a possible Fed rate hike reignited those fears:
Although the distance between the end of the second quarter June 30 liquidity assessment more than a month's time, but if you take into account the mid-June Fed rate hike expectations, as this assessment from the point in time may be about 10 days, then the banks in advance hands-on management of liquidity and may not too late.

"Six months is a seasonal factor factor (purchase of foreign exchange) demand is there, because the feeling is June 15th FED may raise interest rates, the market is expected to stir someone to advance hands." Another listed bank head trader said.

He laments that the rapid rise in US interest rates in China recently, swaps declined rapidly in China showed that the Mainland reaction to the Fed rate hike is even more sensitive than the United States, but now look at the market reaction, "a bit exaggerated."
iFeng: 外媒:中国境内突现美元荒 大行意外回笼美元

Related: How Dollar Short Are Chinese Banks?

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