Good news: the offshore yuan rallied the most in three weeks on Thursday, snapping a six-day losing streak in the process, thanks to a variety of factors, including the apparent restart of trade negotiations between Beijing and Washington.

On Wednesday evening, the Chinese Ministry of Commerce said the U.S. has invited a Chinese delegation to Washington for talks in “late August”. It’s far from clear that’s anything to get overly excited about and indeed, the Ministry’s statement sounded a cautious tone.

USDCNH

“The Chinese side reiterated that it opposes unilateralism and trade protectionism and does not accept any unilateral trade restrictions, [but] China welcomes dialogue and communication on the basis of reciprocity, equality and integrity”, the statement reads. That’s a nice way of saying “please don’t make us fly halfway around the world for nothing like you did in May.”

Still, any news that doesn’t involve an escalation is good news. The tentative thawing in relations comes just a week ahead of the imposition of duties on $16 billion in Chinese goods and also ahead of public hearings scheduled for August 20-23 on Trump’s proposed tariffs on an additional $200 billion in imports.

Traders also cited a stronger than expected yuan fixing.

But it looks like the real catalyst for yuan strength on Thursday is this, from Reuters:

China’s central bank has restricted commercial banks from using some interbank accounts to deposit or lend yuan offshore through free trade zone schemes, two sources with direct knowledge of the matter said on Thursday.

[…]

The move was aimed at tightening offshore yuan liquidity and making shorting the Chinese currency more expensive, traders said.

This is yet another attempt to squeeze shorts, and it precipitated a rather dramatic move in CNH forwards as 12-month forward points jumped from ~400 to 830. That’s the biggest jump since January of 2016.

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