Throughout 2016, China’s central bank, PBOC has been engaged in a fierce battle with capital outflows through smoothing interventions in the FX as well as […]
Throughout 2016, China’s central bank, PBOC has been engaged in a fierce battle with capital outflows through smoothing interventions in the FX as well as offshore money markets. In addition, China’s regulators have also enacted polices to limit capital outflows such as the latest prohibitions on using credit cards to purchase insurance products in Hong Kong.
So far the China’s authorities have been on the losing end of this battle as the USD/CNH has rallied by close by to 8% in 2016 from its March 2016 low of 6.44 and continues its ascend towards the psychological 7.00 level despite “burning” sizeable amount of FX reserves (selling USD) to steam USD strength. China’s FX reserves have been on a decline since January 2015 from USD 38,134 million to USD 30,516 million as at November 2016.
In the retail front, the confidence of holding Chinese yuan notes has deteriorated to a point where 7-Eleven stores in Hong Kong are only willing to exchange one Chinese yuan for one HKD (parity) despite a higher FX spot rate of 1.12 being quoted on the CNY/HKD.
This coming Saturday, 07 January 2016, China’s State Administration of Foreign Exchange is likely to release the latest FX reserves figure for the month of December 2016 which market participants are expecting a continuation of its downward spiral. Interestingly, on Thursday, 05 January 2016 (Asian session) there has been a rumour that PBOC has intervened that triggered a 2.9% decline in the USD/CNH to print a current intraday low of 6.7846, the worst intraday drop since 11 January 2016. The motive of this suspected operation is likely to squeeze some speculative long positions in USD/CNH in order to prevent the USD/CNH from breaking above the key psychological level of 7.00 ahead of the FX reserves data release
From a technical analysis perspective, today’s decline seen in USD/CNH has led it to rest at its long-term key support zone of 6.80/6.70 (see chart 1). The long-term bullish trend remains intact as indicated by its bullish ascending channel in place since 10 August 2015 low. In addition, the weekly RSI oscillator is coming close to a parallel support level of 45% that has coincided with prior major swing lows area in the price action of USD/CNH. Therefore, as long as the key pivotal support of 6.70 holds, the USD/CNH is likely to resume its upleg to see a test on the 7.0080 level before targeting the long-term resistance of 7.1800. A further up movement in USD/CNH will reinforce further capital outflows.
The continuation of capital outflows from China is likely to trigger a liquidity squeeze where China’s benchmark interest rates are likely to inch higher (the yield on the 10-year sovereign bond has spiked up from around 2.6% in October 2016 to 3.4% in December 2016 before it backed down slightly to 3.03% on 04 January 2017 (source: www.tradingeconomics.com). An increase in interest rates will magnify the current bad loans problem in China’s banking system where it has a delinquency rate of close to 30%. From a cross-asset perspective, this effect is likely to be perceived as a negative pressure on profit margins of Australian commodities related firms where their fortunes have been closely tied to the health of China’s economy. Since the post U.S. presidential election on 09 November 2016, Aussie commodities related stocks have rallied by close to 20% in anticipation of Trumponomics. However from a technical analysis perspective, the current rally is being overstretched where one of the majors, Rio Tinto faces the risk of a medium-term decline at this juncture (see chart 2). As long as the 63.45 pivotal resistance is not surpassed, Rio Tinto may see a decline to towards the 56.26 support and even 55.30.
Source: eSignal (click to enlarge chart)
Source: eSignal (click to enlarge chart)
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