China Economy Showed Green Shoots amid Stimulus and USDCNH Spot Trends Lower
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Summary: Recently PBOC announced two monetary easing measures together with previous fiscal stimulus package to support economy, which has showed some green shoots. USDCNH/CNY spot is likely to trend lower into 2020 mainly on reduced China-US trade tensions and technical set up.
Monthly Macro Outlook: Green Shoots Amid Stimulus
- In November we mentioned that fiscal stimulus measures are on the way with issuance of debt earmarked for infrastructure projects expected to speed up at local government level. Since then, two monetary easing measures had joined the stimulus package: 1) The benchmark loan rate LPR (Loan Prime Rate) expanded its applicable loan category from incremental loans to existing loans, aiming to further reduce borrowing cost of real economy. Since LPR reform back in August, the 1-year LPR has dropped 16ps and 5bps for 5-year; 2) PBOC lowed RRR (Reserve Required Ratio) by 50bps releasing about 800bn RMB liquidity, part of which though is to smooth liquidity gap before the Chinese New Year. Actually before PBOC took action, Vice Premier Li Keqiang had declared the intention to lower RRR in late December therefore this RRR cut is well expected.
- These two monetary easing measures combined has conveyed a clear signal to market that China’s central government has strong commitment to support the economy growth. As shown in the China Macro Data Dashboard below, after the weakest October prints the latest November prints showed some green shoots especially in core data sectors like Manufacturing PMI, Industrial Production and Industrial Profit. The credit data like New RMB Loans and Aggregate Financing also back into expanding regime.
- Regarding US-China trade talk, on December 13 China and US announced phase-one deal. Before this announcement, great frictions happened between China and US in political and ideological space, eg the passage of Hong Kong Bill. Fortunately those confrontations didn’t negatively alter the progress of highly expected phase-one deal. Global market’s risk appetite and growth outlook has been substantially improved since then, especially China’s commodities sector.
- In conclusion the outlook for China is positive in coming months with latest macro data showing green shoots, external trade uncertainty and pressure marginally and largely reduced together with domestic stimulus package.
USDCNH/CNY Spot: Trend Lower into 2020
- In the past December, USDCNH spot remains much headline driven with overall trend lower. The big volatility came on December 13 when China and US announced phase-one deal to be signed and USDCNH spot dropped more than 1000 CNH pips to 6.9200 handle, lowest since August 2019. Looking into 2020, the outlook for USDCNH/CNY spot is biased to the trend lower mainly on much reduced China-US trade tensions.
- Technically, USDCNH spot is testing the key support range 6.96~6.98, which are confirmed by previous highs and lows and deserve being monitored. The technical pattern is downward triangle with lower highs and in line with near term outlook that USDCNH spot is biased to the trend lower.
- Continuing with the second half of October, USDCNY fixing remains reactive and much in line with market expectation. The volatility and magnitude of spread between onshore CNY and offshore CNH further reduced.
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