FX Daily: CNY falls within a whisker of YTD low

28th May 2014

  • There were continued claims Deputy PM Nick Clegg considered resigning the leadership of the Lib Dem party, following their disastrous European election results. Clegg has denied the claims and says he will stay to fight. (The Times)
  • German Chancellor Merkel said Tuesday a greater spectrum of candidates should be looked at for the position of President of the European Commission. Although not fully endorsing Jean Claude Juncker for the role, Merkel said he remains her favoured candidate. (MNI Market News)
  • A systemic-wide monetary policy easing is unlikely and the central bank is expected to continue with selective easing to support the economy. The Basic direction for monetary policy would be to keep the overall money supply stable but improve the credit structure. (China Securities Journal)
  • Some Chinese government officials are rushing to offload their properties in Shenzhen as the government steps up its anti-corruption campaign. (China Securities Journal)
  • China’s Treasury futures extended gains at the Wednesday open following market talk that banks are going to be allowed into the market soon. There’s talk that regulators met with banks on Monday to discuss letting them trade treasury futures, a move that’s expected to lead to big inflows of liquidity into the market following its re launch last year. (MNI Market News)
  • BoJ’s Kuroda said the flexibility of forward guidance is important and use of communications to work on expectations is vital. He also noted easing is possible under zero interest rates.
  • Fed’s Lockhart, speaking in Baton Rouge yesterday, said 6 months from QE end to rate hike was too short a timeframe. The Atlanta Fed President saw the first rate hike in the second half of 2015 but said “continued monetary accommodation will be warranted for some time”. (MNI Market News)
  • Australia’s Westpac Leading Index contracted -0.5% in April, following a flat reading in March.
  • New Zealand’s ANZ Business Confidence fell to 53.5 in May from 64.8 in April.
  • China’s Industrial Profits YTD increased 10.0% in April, marginally lower than 10.1% previously.
  • German unemployment unexpectedly rose for the first time in six months, by 24K leaving the unemployment rate unchanged at 6.7%.

There was some good news for sidelined dollar bulls yesterday with a raft of positive US data. Durable goods excluding transport showed a lacklustre 0.1% monthly growth in April, but back revisions showed a significant bounce back in investment in March as the weather improved. Capital Goods Orders Non defence excluding aircrafts recorded a -1.2% fall in the month, but the March figure was upgraded to a 4.7% increase. Despite a number of upgrades for inventory since the initial US GDP estimate of -0.1% annualised quarterly growth, we still expect the figure to be downgraded to contraction territory in Thursday’s reading. While inventory growth may now have been upgraded for February and March, overall it falls short of the provisional estimates already pencilled in by the Department of Commerce. The initial estimate of 0.1% annualised first quarter growth was actually an optimistic view by the US Commerce Department. Subsequent downgrades to construction spending and soft factory orders data won’t have helped the case either.

We can effectively take Q1 as a right-off. Fed’s Lockhart, speaking yesterday, also warned of an outright contraction in US GDP for the quarter, but still believed the US could achieve 3% growth in 2015, the wholly grail in terms of growth rates. US Markit Services PMI comfortably beat estimates and left the Composite PMI for May at its highest level since records began in 2011. The beat of the S&P Case-Shiller House Price index, following stronger Existing and New Homes Sales last week will ally fears about stagnation in the housing market, which was gaining concern at the Fed. The data are consistent with a post-winter bounce back but fall short of indicating 3% growth this year. If Lockhart’s prediction for the first rate hike in the second half of 2015 was based on a 3% growth figure, we are unlikely to see the first Fed Funds Rate hike until late 2015 or earlier 2016 with growth on course to come in below this figure. The divergence in monetary policy between the UK and US means sterling-dollar is set for further upside moves. The market is extremely long sterling which means the path higher will be subject to bouts of profit taking. However rates above the $1.70 level are achievable in the short-to-medium term. if you have the nerve to withstand the market shake-outs.

The Chinese yuan dropped sharply yesterday despite the PBoC setting the fixing only slightly weaker. The yuan lost nearly 100 pips against the dollar, to within 38 pip of its high April 30th year-to-date high. We continue to scorn the sceptics that believe CNY depreciation is a way for China to boost exports. China’s historical management of its exchange rate has always sought to target balanced external accounts, which meant yen appreciation as well as depreciation. We would also caution against speculators falling back into the thinking that yuan trading is a one way bet. Many traders even overlooked the yuan’s trading band limit back in late April and were given a shock when the USDCNY rebounded sharply off its upper limit. Chinese policymakers have a long-term goal. Just as they are in the process of weaning the economy off debt and overcapacity, it also is on track for its long-term goal of internationalising the renminbi. Sustained depreciation will undermine the renminbi’s credibility as a medium to long-term store of value. Although significant devaluation over several months is a different story. We believe in the short term yuan fixing will be used as a tool to contain capital inflows/outflows and stabilise the current account. In the long-term the overall goal for yuan trading is to improve flexibility and a move to a freely floating exchange which means the days of one-way CNY bets are over.