Fundamental Forecast for the Yuan: Neutral
The volatility in Yuan rates elevated this week: the broke the support of 6.6832 that was held last week and found new support around 6.6650. In terms of the upper band, the pair rose towards the psychological level of 6.7000 once again on Friday. After the G-20 meetings ended last weekend, market speculation on a weaker Yuan has heated up. However, moves from the PBOC past week signals a different tone. Yuan’s daily fix set by the Central Bank over the past five days were at or below 6.6684, which is a level distant from the key psychological level. Also, Yuan’s overnight borrowing rate in Hong Kong soared on Thursday, hitting the highest level since late February; the short-term borrowing rate remained elevated on Friday. The tightened Yuan liquidity in the offshore market has increased the cost of shorting the Chinese currency, adding obstacles for the USD/CNH to crack above the 6.7000 level.
A driver may lead to a sustainable breakout above such level is an increased odds of Fed rate hikes in the near-term. The outlook on Fed rate hike has contributed to the largest moves in Dollar/Yuan of recent: the USD/CNH broke below 6.6832 on the past Tuesday, following a weaker-than-expected U.S. August ISM Non-Manufacturing print that reduced the odds of Fed rate hike in September. In the coming week, the U.S. will release heavy data including Advance Retail Sales, Jobless Claims, Existing Home Sales, and Consumer Price Index for August. If these prints come in better-than-expected, the probability of Fed rate hikes may rise again and then boost the Dollar. Also, the major U.S. data will be announced on September 15th (Thursday) and 16th (Friday), when Chinese onshore markets will be closed for a national holiday. This may give the offshore Yuan additional flexibility as the PBOC will not issue the daily fix on those days.
In terms of even risks from China’s side, Industrial Production, Retail Sales and fixed Assets reads will be released on Monday. These prints may have limited direct impact to Yuan pairs but could give us a broader picture of the economy; Chinese regulators may also adjust monetary and fiscal policies accordingly. One of the key indicator to watch is China’s fixed assets investment: the growth has dropped to 8.1% in July, the lowest level in sixteen years. The August print could give us some clues on whether investment condition has reached the bottom.-RM