Emerging Market FX: China FX Reserves Decline
The PBOC’s China FX reserves decreased US$99bn to US$3.23tn in January (Bloomberg consensus: -$118bn; December: -$108bn). After adjusting for estimated currency valuation effects, the fall in reserves may have been about US$89bn (vs. estimated – $130bn in December). As has been the case in the last few months, additional SAFE and PBOC data, likely to be released in the next two weeks, should give useful supplemental information regarding the underlying flow situation.
The People’s Bank of China (PBOC) reported that its foreign exchange reserves fell by US$99bn in January (vs. a US$108bn decrease in December), to US$3.23tn at the end of the month. Estimates suggest currency valuation effects could amount to around -US$10bn (assuming the currency composition of China’s FX reserves is similar to that of the global average), and therefore sales of FX reserves might have been about US$89bn in January (vs. estimated $130bn in December). The continued rapid loss in FX reserves suggests that FX outflow remained at a rapid pace.
FX reserve data do not necessarily give a comprehensive picture on the underlying trend of FX-RMB conversion by corporates and households. This is not related to any accuracy issues of reserve data, but is due to the fact that valuation effects are uncertain and that other non-PBOC financial institutions may also use their (spot) balance sheet to absorb underlying flow pressures. Correspondingly, the PBOC or related entities may have accumulated forward positions that do not affect reserves immediately.
A preferred gauge of the FX-RMB conversion trend among onshore non-banks would be based on SAFE data on banks’ FX settlements on behalf of their onshore clients. That report captures banks’ FX transactions vis-à-vis non-banks through both spot and forward transactions, and will be out on February 23. Data on the positions of FX purchases by the banking system should also shed useful additional light, and are likely to be released around middle of the month.
Technical & Trading Takeaway
From a technical and trading perspective the USDCNY remains bullishly orientated and is currently threatening to break the topside of the daily bullish flag pattern that has been developing. My bias is for the upside break of 6.5900 from this consolidation would target the topside of the projected channel towards 6.7050.
If price breaks lower I believe there will be an excellent risk reward with trend entry as price retests former spike highs and ascending channel support at the the 6.4900 level where I would be watching for intraday reversal patterns to venture long targeting the topside of the channel.
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