What is holding up the yuan?

See the latest Australian dollar analysis here:

Macro Afternoon

The attitude in markets is all one-way:

China’s central bank set its strongest reference rate for the yuan in three years in a sign it’s loosening its grip on the currency amid a relentless rally.

The People’s Bank of China set the reference rate at 6.3485 per dollar, the strongest since May 2018, similar to the average estimate in a Bloomberg survey. The move came after the dollar fell for two straight days, and indicated that the central bank is allowing the market to drive the yuan.

Deputy Governor Liu Guoqiang nodded at the yuan’s strength on Tuesday, while indicating that policy and market factors will correct any short-term deviation from what is perceived as its equilibrium level. With China cutting a key interest rate this week, and the Federal Reserve expected to start hiking from March, the PBOC may be relying on policy divergence to slow yuan gains rather than through other means.

Remarkable stuff given this:

I note that the last big fall in CNY was also delayed as the Fed tightened and PBoC didn’t in 2015 and 2018.

Eventually, carry should win. Pouring hot money into China now as the currency is set to fall is a loss-making notion. It’s not easy to short this pair when you know that it’s costing you money on the negative carry. But that is perhaps more a delaying agent than an ultimate deterrent.

When CNY does roll, expect global inflation fears to evaporate shortly afterward.

Houses and Holes

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