Emerging Market FX: USDCNY 300Pip Reaction From Support Set Up
It looks like the ‘macro prudential’ measures put by the authorities, in conjunction with their intervention in onshore and offshore RMB markets, is paying off according to Deutsche Bank Analysts. Data from multiple sources suggest that the tide of capital outflows is subsiding, at least for now.
Net FX settlements and sales by Chinese banks on behalf of clients was ~-$34bn in the month of February. After adjusting the same ‘fundamental’ flows (February net trade balance and net FDI transacted in foreign currencies), FX outflow from China during the month amounts to $49bn, analysts at Deuteche Bank conclude . This was almost half the outflow in January and the smallest outflow since June last year. This number is broadly in line with the estimates derived using FX reserves after adjusting for FX valuation effects. At a more granular level, outflows appear driven by corporate activity, such as repayment of FX loans. Since July 2015, FX loans have declined by $120bn to $817bn. In addition, importers remain active in buying USD in the spot market to manage their FX liabilities, while exporters are converting only 47% of their export proceeds from foreign to local currency, which is still low, according to our records. Interestingly though, the recent stability in USD/CNY and the string of macro prudential measures are becoming effective in persuading (1) exporters to bring back more USD and (2) importers to buy less USD. It will be interesting to monitor this flow data in the coming months to see whether corporate clients’ preference for dollars subsides.
The data also corraborates what Deutsche Bank learnt from the net FX purchases by financial institutions reported by the PBoC. This series has been modified since January to include only net FX purchases by PBoC, and for the month of February, was also around $35bn, in line with net FX settlements and sales by banks. We understand that some discrepancies still exist between the two data sets: (1) accounting measures – net FX purchasing uses cash accounting, whereas net FX settlement and sales on behalf of clients are accounted on an accrual basis; and (2) measurement errors – FX settlements and sales are statistical data collected by the SAFE from designated banks on a daily basis. On the other hand, the positions of FX purchases are actual spot transactions performed by the PBoC in the onshore FX spot market.
Technical & Trading Takeaways
In combination with the Deutsche Bank fundamental analysis, from a personal perspective I have been highlighting the bullish price pattern that has been developing in the USDCNY, as referenced fromthe quote and chart below taken from my March 7 report.
”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 6.4700/6.4500 level where I would be watching for intraday reversal patterns to venture long targeting the topside of the channel. My interest in this trading level has increased with the current price pattern setting up a symmetrical AB=CD decline into the support zone as highlighted in the chart below”
If we compare the chart above with today’s chart you can see the set up has played out perfectly, buyers stepped in right on queue at the support level I highlighted as the pair has since bounced 300pips. While the current low is maintained we could now have a platform in place that could see a dramatic rise in the USDCNY as price targets the topside of the projected channel. Traders who missed the first entry into this position can monitor price action for a potential double bottom set up to enter positions. I will update entry opportunities in coming reports as price action develops.
For updates on trade of the day set ups and the other trades I am currently monitoring be sure to follow me on Twitter @LFXPatrick