Fundamental Forecast for CNH: Bearish
- Trade practices around China and its major partners pose risks to the Yuan.
- PBOC official confirmed neutral monetary policy; Yuan lacks support to extend gains.
- Check out retail traders’currency pecking orderat the DailyFX Sentiment page.
The offshore Yuan gained for the eighth consecutive week against the U.S. Dollar; the USD/CNH dipped 6.2769 on Friday, the strongest level for the Yuan since China reformed its exchange rate regime on August 11, 2015. China’s Central Bank also strengthened the Yuan guidance rate to a 2.5-year high level. Looking forward, event risks from home as well as regulators’ guidance will be top drivers to Yuan rates. China will release the trade report for January next week. Both imports and exports are expected to grow at a faster pace than in the previous month. Yet, the rising protectionism around the world threats the outlook of China’s trade.
Tensions with its U.S. counterpart seem to be less intense than expected by the end of January. In the middle of the month, Trump administration imposed steep tariffs on imported solar panels, bad for China, but also impact other countries such as South Korea and Thailand. In Trumps’ first State of the Union address this week, he did touch on trade issues but not talk harsh directly against China. This may help to ease some tensions temporarily. What matters more is over the following months, whether Washington will unveil more trade sanctions against China and how will China respond.
In addition to pressure from the U.S, there are uncertainties from China’s other business partners: Germany recently proposed a draft with Italy and France to EU in the effort to constrain Chinese mergers and acquisitions. British Prime Minister Theresa May met with Chinese President Xi Jinping in Beijing this week, British top official’s first visit after the Brexit decision. Bilateral trade deals in the post-Brexit era is one key topic between the two parties. Yet, this meeting is more a start of conversations; there is a long way to go before the two parties can reach material agreements.
“China will continue to maintain prudent and neutral monetary policy in 2018”, told by Yi Gang, the Deputy Governor of the PBOC this week. The Central Bank will control credit expansion and avoid to flood the economy with cash simply for boosting the growth. The unscheduled New Yuan Loans print for January will be released later next week or the one after the next. According to Bloomberg, the gauge is expected to jump to 2050 billion yuan from 584 billion yuan in the month prior. Even taking into account seasonal factors, this read would still be less desirable, and thus adds more reason for the regulator to extend the current policy.
From a technical point of view, the USD/CNH broke below 6.3557 and is testing around 6.2979-6.3100, a major support zone and the bottom of both the short-term and medium-term channels. Also, the Friday candle indicates that buyers have come in and thus watch for possible retracements next week.