BNY Strategist Geoff Yu highlights that CNY initially behaved like a secondary safe haven during the conflict, with strong performance and managed volatility, while flows showed an inverse relationship with CGB holdings. Early Q2 data now point to simultaneous buying of CNY and Chinese Government Bonds (CGBs), suggesting growing outright CNY exposure despite low relative yields and ongoing PBoC resistance to REER appreciation.

Flows hint at evolving Chinese safe-haven bid

"During the first week of the conflict, CNY was the best-performing currency, prompting us to explore whether it could serve as a secondary safe haven (after the dollar). Compared to savings-heavy APAC peers, its energy resilience was stronger, and currency volatility was heavily managed."

"However, our flows indicated that the period of CNY purchases was fully aligned with large outflows from Chinese government bonds. The CNY-CGB inverse relationship has been consistent for most of the year so far, so the CNY purchases reflected unwinding of CGB holdings, likely driven by fears of higher inflation pushing down real rates."

"CGB interest returned toward month-end, and we saw CNY flows also shift back into net selling as hedging likely picked up. However, early Q2 flows point to a change in behavior, with CNY and CGBs now both being net bought. This could be an early indication that markets are seeking greater CNY exposure outright – with CGBs now being bought at lower hedge ratios."

"On the other hand, there is also the possibility that for the first time since the post-pandemic re-opening, there is genuine reflation taking place in China, and the market may be misjudging the outlook for front-end yields. Coupled with expectations of an easing-inclined Fed (even before the ceasefire was announced), keeping the same hedging dynamics on any Chinese asset may not have the same risk-reward as in previous years."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)