The long end of the USD/CNY swap fell to over a six-month low on Thursday, reflecting the widening interest rate differential between the US and China and the cooling of market expectations for a Federal Reserve rate cut.
Long-end Swaps Hit a Staged Low
The one-year USD/CNY swap fell below -1,500 points to around -1,522 points, the lowest level in more than half a year. Short-term swaps also retreated, with overnight swaps trading around -4.6 points.
Market participants stated that domestic US dollar liquidity remains tight, while persistent forward settlement demand is exerting downward pressure on long-end swaps.
Geopolitical Risks Drive US Treasury Yields Higher
Escalating tensions in the Middle East have become a crucial variable. The blockade of the Hormuz Strait and attacks on energy facilities have driven up oil price expectations, leading to a rebound in US Treasury yields.
Interest rate futures indicate that the market has lowered its expectations for the Federal Reserve's easing path, now forecasting an annual rate cut of about 20 basis points, further narrowing from previous expectations.
Interest Rate Differentials Drive Swap Trends
Analysts point out that the USD/CNY swap is highly correlated with the US-China interest rate differential. As US Treasury yields rise and Chinese rates remain relatively stable, the widening negative interest rate differential between the two countries is continuously pressuring the long-end swaps.
In the short term, the market expects the long-end swaps to continue oscillating at low levels, with trends dependent on geopolitical developments, oil prices, and the Federal Reserve's policy path.
