UKRAINE: WH NSA-Aid Pause Could Be Lifted If Peace Talks 'Nailed Down'

While much of the focus has naturally been on Mexico and Canada and the possibility of last-ditch talks to lessen the impact of tariffs, the 10% levy on Chinese imports looks much more appropriately priced - and USD/CNH is fading further off the highs as a result and looking to close the gap with the Friday close at 7.3223. Recall Chinese markets return from LNY on Wednesday.

• We wrote on Friday that CNH downside could be limited through this first phase of tariffs, as the reaction function of the Chinese authorities remains key. MNI wrote on January 17th that the PBOC will limit any sharp depreciation of the CNY in response to tariff uncertainties as sharp CNY depreciation will worsen capital outflows and impede monetary and fiscal policy coordination.
• The toolbox available to limit CNY declines is sizeable: USD liquidity and use of the counter-cyclical factor is likely the first line of defence, but tweaks to both the FX RRR (last used in 2023) and deposit requirements for FX forwards remain tools to be used should markets become disorderly.
• Any agreements made between China and the US will be taken in the context of the 'Phase One' agreement signed in Jan'20 which allowed for FX rate flexibility as a release valve for internal/external economic imbalances - and could limit criticism of fluctuation in FX rates over the medium-term.
• As such, CNH downside could be limited over the short-term - price action that would work against options market pricing that increasingly favours USD/CNH calls. As such, collecting premiums via selling USD/CNH topside would stand to benefit.

• In the FI space,  Bund futures are trading higher today as the contract starts the week on a bullish note. Price is through resistance at 132.22, the Jan 22 high, and has cleared both the 20- and 50-day EMAs. The break higher confirms a resumption of the corrective bull cycle that started Jan 14. This signals scope for an extension towards 133.73, 50.0% of the Dec 2 - Jan 14 bear leg. Firm short-term support has been defined at 131.00, the Jan 16 / 24 low. Initial support is at 132.02, the 20-day EMA.
• Recent gains in Gilt futures continue to highlight a corrective phase and signal scope for a continuation higher near-term. Last week’s high print and today’s gains, reinforce current conditions. The contract has traded through 93.09, the Dec 20 high. Sights are on 93.64, 61.8% of the Dec 3 - Jan 13 bear leg. The bear trigger has been defined at 88.96, the Jan 13 low. Initial firm support is at 91.52, the Jan 24 low. First support lies at 91.99, the 20-day EMA.

• Date $MM Issuer (Priced *, Launch #)
• 02/03 $Benchmark Romania 12Y +325a
• Expected Tuesday:
• 02/04 $3B EIB WNG 10Y +60a