Fundamental Forecast for the Yuan: Bearish
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The Chinese Yuan pulled higher both on onshore (CNY) and offshore markets (CNH) against the greenback following the more dovish-than-expected comments from the Federal Reserve this week. Chinese NPC and CPPCC meetings ended after releasingthe country’s top strategies for 2016 as well as the next five years. Looking into next week, data on the calendar is light. As the NPC theme is over, Yuan is likely to enter a retracement area.
Because of Yuan’s managed floating regime,the daily reference rate largely affects the onshore and offshore rates. China’s Central Bank raised Yuan’s daily reference rate by 211 pips last Thursday and 333 pips on Friday following the USD-weakness driven by FOMC. Since the Chinese Yuan was de-pegged from the US Dollar on August 11, 2015, there have only been five instances that the daily reference rate moved up more than 200 pips. Three out of the five happened over the past 7 days: March 14 (222 pips), March 17 (211 pips) and March 18 (333 pips). After these relatively aggressive moves on the reference rate, it is likely that next week will see the PBOC slow down the pace of guiding Yuan higher. The Central Bank has reiterated that Yuan’s floating-rate is stable relative to a basket of currencies. The regulator had fought against Yuan short speculation over the past two months, but don’t forget that the bank also has had years of experience in dealing with long-Yuan speculation before de-pegging against the Dollar last year.
In addition, from a technical point of view, USD/CNH ran down to the 61.8% retracement level of Oct 30, 2015 low to Jan 17, 2016 high. Next week, there is not much big news on the calendar that may to drive a trend so it may give the market some time to correct. China’s top annual meetings during the past two weeks have released a heavy load of national plans and strategies. It normally will take a while for local governments to digest and design detailed measures. We may see some new regional policies designated to continue the promotion of the housing market next week, though they may have limited impact to financial markets.
Another related market worth to look is China’s equity market. The Shanghai Composite gained over 5% last week as the government was injecting funds to the market during the NPC and CPPCC sessions. The coming week will be a good illustration of overall equity strength; to see if it was a temporary gain solely driven by the government support or whether the national plans have led to legitimate new trends. Despite the fact that a new equity board for emerging industries was removed in the 13thFive-Year Plan, the country has not stopped promoting emerging industries. Information technology, new energy vehicles, biotechnology, green low-carbon, high-end equipment and materials and digital industries have all been classified as emerging industries and included in the Five-Year Plan. Therefore,investorsmaywantto watch if equities in these industries show strength next week as they are the sectors that may provide long-lasting momentum to Chinese equity markets. Improved conditions in the equity market will help slow down capital flowing out of China and this may ease pressure on Yuan shorts.
