CNY: broad-based sell-off highlights sensitivity to developments in China - MUFG

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 5, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Lee Hardman, Currency Analyst at MUFG, suggests that the renminbi and the Chinese equity market have reportedly both derived support overnight from the Chinese authorities.

    Key Quotes

    “The Dow Jones newswire has reported that the PBoC has been intervening to support the renminbi. The onshore renminbi is on course to close modestly higher today against the US dollar after yesterday’s sharper decline. In contrast, the offshore renminbi which is less impacted by intervention has continued to weaken against the US dollar resulting in the spread between the onshore and offshore rates reaching the widest level since September 2011.

    Bloomberg has also reported that state-controlled funds purchased domestic equities, and the China Securities Regulatory Commission has asked bourses to tell listed companies that the six-month sales ban on major stockholders will remain valid beyond the 8th January. The sales ban was initially announced on the 8th July applying to investors with holdings exceeding 5% of a single stock along with corporate executives and directors. The PBoC has acted as well to boost liquidity by offering CNY130 billion of seven-day reverse repos.

    The developments have brought back memories of financial market instability which was evident during the third quarter of last year. The broad-based sell off in global equity markets clearly highlights that investors continue to remain very sensitive to ongoing developments in China.

    It was also interesting that the US dollar held up relatively well yesterday during the more intense period of risk aversion. More recently the US dollar has underperformed especially against the euro during less favourable conditions for global investor risk sentiment as long US dollar positions have been reduced.

    US dollar strength continues to remain most evident against emerging market currencies. As a report released by the Institute of International Finance (IIF) clearly highlights emerging market currencies continue to remain under downward pressure from the weakening domestic economic fundamentals and less supportive capital flows.

    Weakness was again evident yesterday in global manufacturing activity. The latest business confidence surveys covering the manufacturing sectors from China, the UK, and the US all disappointed consensus expectations reinforcing investor concerns over the outlook for global growth. The weaker than expected headline ISM manufacturing reading which declined to a new low and is consistent with continued stagnation has had limited impact on the US dollar.

    The manufacturing sector has lost jobs at an average amount of 7k/month since the summer although it hasn’t prevented the US economy as whole from still adding jobs at robust amount of just over 200k/month. The release this week of the latest non-farm payrolls report for December is expected to reveal a similar pace of job growth.”
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