FUNDAMENTAL FORECAST FOR CNH: Bearish
- The Yuan may avoid the panic mood from Chinese equities amid top officials’ calming comments.
- The probability of PBOC further cutting RRR has increased and is not good news for the Yuan.
- New momentums such as a trading link will take time to develop before can bring real benefits.
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The Chinese Yuan (CNH) extended losses against the U.S. Dollar for the fourth consecutive week, despite that it gained to a few other major currencies, such as the EUR, the GBP and the CAD. At the same time, China’s benchmark equity index, Shanghai Composite Index, rebounded on Friday, after it broke below 2500 and hit the lowest level since November 2014. Looking forward, China will have a light economic calendar; market sentiment, domestic policies and international relations will be top drivers.
Four Chinese Top Officials Commented on Financial Market
Multiple Chinese financial officials provided calming comments on Friday amid the volatility seen in the stock market and the slower-than-expected growth in the third quarter. This may help to ease the selling in stocks driven by sentiment, which is not uncommon in the Chinese equity market, with a large proportion of retail investors. This could further help to prevent the panic mood from spreading to the FX market, like the instance in January 2016.
Here are the highlights of officials’ comments:
China’s Vice Premier Liu He said that the valuation of Chinese equities is “at a historical low level”; he sees Chinese stocks “have high investment value”. Liu is the Vice Premier who oversees the economic and financial sector. His response reflects the view from the highest level of the government.
PBOC’s Governor, Yi Gang, told that the central bank is working on more measures to help private companies to finance. Currently, commercial banks are less willing to lend to private firms, compared to state-owned enterprises; the latter are considered to be backed by the government directly or indirectly. The statement hints at a possibility of another cut in reserve requirement ratio in the foreseeable future. Such a move could drag down the Yuan, as what was seen following the October cut.
The Chairman of China Securities Regulatory Commission Liu Shiyu, and the Chairman of China Banking and Insurance Regulatory Commission Guo Shuqing also announced measures from their agencies to support the financial market on the same day. What matters more is that the announcements revealed the cooperation and collaboration among financial regulators: their joint influence on the market is expected to be greater than just one working by oneself.
China’s International Relations
China is seeking to strengthen ties with global partners, amid the US-China trade war. China’s Premier Li Keqiang met UK Prime Minister, Theresa May at the 12th Asia-Europe Meeting Summit in Brussels. The two sides agreed to escalate the launch of a stock trading link between London and Shanghai, which is estimated due by the end of this year. Developments such as this could bring in new momentum to the Chinese market, but it may take some time to show its impact.
In the near-term, keep an eye on whether China and Japan will reach major trade deals next week. If so, the good news may offer some temporary gains in the Yuan. However, it is unlikely to change the bearish trend of the Yuan against the U.S Dollar, while the Fed and the PBOC are on different tracks of monetary policy.
— Written by Renee Mu, Currency Analyst with DailyFX
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