PBOC Fighting Back
The PBOC has taken a series of steps this week aimed at halting the ongoing rise of the Chinese Yuan. USCNH is down over 3.5% this year alone, and more than 11% from the 202 highs. The rally in CHN has been driven by a combination of factors such as the swift and sustained recovery from the pandemic lows, the quick handle the government got on the virus and the general improvement in risk appetite, along with the weakness in the US Dollar. However, now it seems the Yuan has gone too far and the central bank and government are seeking to prevent any further gains.
FX Reserves Requirements Increased
On Monday, the PBOC announced that as of June 15th, financial institutions will be required to step up their holding of foreign exchange holdings from 5% to 7%. This increase will effectively force banks and institutions to bolster their FX reserves, removing that capital from the impacting foreign exchange prices. The move marks the first such increase since May 2007, pre GFC. Industry commentators project that the 2% hike will amount to around a $20 billion reduction in foreign exchange transactions for the purposes of long-term trading. The move has been described as a from of monetary policy targeting aimed at limiting speculative activity which has been highlighted as driving the recent Yuan rally.
Monetary Policy Divergence
The government and the PBOC has been increasingly concerned about the health and competitiveness of the country’s exports as a result of the stronger Yuan over the last year. The government has been fighting to keep the economic recovery on track. However, given the divergence in monetary policy between China and much of the rest of the world, money has been flowing into China, driving yuan higher.
China Concerned Over Commodities Rally
Along with the rise in Yuan, China has also been increasingly concerned with the surge in commodity prices. Last week, the government announced it would be stepping up its funding for privately run businesses in a bid to curtail the passing on of higher prices or the negative impact of suffering reduced margins.
Weaker Fix
On Wednesday, the PBOC also set a weaker fixing against the US Dollar, putting an end to six straight days of stronger fixings. The daily fixing is another key channel the PBOC uses to impact the strength of the Yuan. The PBOC sets the level and allows the Yuan to move 2% higher or lower from it.
Technical Views
USDCNH
The sell-off in USDCNH this year has seen price breaking below the 6.4018 level, which was the prior 2021 low, as the bear channel continues to extend. However, MACD and RSI divergence has been building on the last leg of the decline and price is now correcting higher within the channel. If price can break back above that level and the channel top, bulls will be looking for a run up to the 6.4964 level next.
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Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.