Fundamental Forecast for the Yuan: Neutral to Bearish
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The Chinese Yuan Offshore Exchange Rate (USD/CNH) saw little volatility despite a much larger breakdown in the US Dollar, and traders were reminded that CNH remains closely correlated to the onshore Yuan exchange rate (USD/CNY). Chinese officials kept the CNY within its stated 2% range. Looking into the next week, however, it will be important to watch New Yuan Loans data and Chinese Consumer Price Index results as potential drivers for USD/CNH moves.
The New Yuan Loans release is believed to reflect the effectiveness of the People’s Bank of China’s stimulus measures, and it will be important to watch for gains given that the PBoC has cut interest rates 6 times. The most recent one was in late October, and despite the cut New Yuan Loans came in lower than expected through the same month—down nearly 50% from September’s total. The data disappointments show that the central bank is merely pushing on a string; commercial banks have less incentive to issue new credits amid concerns on bad debts. Also, companies are less willing to expand their business. Another figure added as a proof is the total loans made by the four top Chinese commercial banks in October, which fell for the first time since the heights of the global financial crisis in 2009. As a result, the new yuan loan will be a good indicator for traders to get to know the market sentiment in China. According to estimates by Bloomberg, the November number is expected to improve by nearly 50% to 750.0 billion yuan.
The China November Consumer Price Index is another main driver for yuan trading in the week ahead. China’s CPI has fallen from its peak level of 6.5% in July 2011 to the current level of 1.3% in October 2015, coupled with the slowing down in growth to below 7%. What matters for traders is not what is already widely known – China’s economy is in a transitional period. Instead, it is in this transition period the government will be more sensitive to the market performance and is ready to take reactions to prevent potential social problems brought by the slowing down in the economy. Therefore, if we see more unfavorable ratios, we can prepare to see more government interventions, either with monetary and fiscal policies. These would likely have a major impact on the demand for Yuan and, by extension, the USD/CNH and USD/CNY.
As Chinese lending momentum and inflation remains relatively low, we don’t expect strong economic data support for the Yuan in the week ahead. And indeed, our broader outlook for the CNY and CNH remains mixed to bearish.
