Why is China not following Fed rate cut and where will USDCNH go?
Greater China Sales Traders
Summary: We estimate that PBOC's monetary policy easing tendency will continue to be contained amid slowing economy growth. A key concern now is skyrocketing pork retail price and highly correlated CPI. USDCNH spot will probably revisit 7.0 big figure level at conjunction of multiple supporting factors.
Monthly Macro Outlook: Fine Tuning
- The latest Chinese GDP print, at 6% in the third quarter, was not really a surprise for those monitoring closely high-frequency data. We estimate there is no sense of urgency to massively stimulate further the economy. Except for freight volume growth, the most important data we monitor for the Chinese economy are back to life: the PMI manufacturing is standing at 51.4, real estate FAI growth remains well-oriented and the CNY exchange rate has been stable over the past weeks. These indicators tend to validate the fine-tuning strategy implemented by the authorities.
- The room for manoeuvre of monetary policy is limited in the short term due to the surge of CPI (related to higher pork prices), deflated PPI and weakness of the monetary policy transmission mechanism to the private sector. However, domestic analysts’ views are widely divided regarding whether PBOC should inject stimulus with current CPI condition. Some call for monetary policy not to be shy of inflation. It added that there was still a need to prioritize stimulating demand. Nevertheless, PBOC is not following the US Fed and ECB in cutting rates and maintain its prudent monetary orientation.
- We expect that Chinese stimulus will be limited in coming months and will mostly target some specific sectors, especially the real estate sector (which represents 80% of Chinese people’s wealth). The chat below shows the high correlation between overall CPI and port price. The economic rationale behind this high correlation include Chinese food protein source structure and spillover effect.
On US-China trade talk front, investors’ sentiment is largely more positive thanks to hopes of trade agreement between China and the United States. Into the end of October, gradually there’s some small uncertainty coming out that US and China may not sign the deal at Chile APEC meeting originally planned next month probably due to ongoing Chile riot and complexity of deal text itself. However, top officials from both sides are sending optimistic signals regarding progress made at the same time and market believes it’s just a matter of time.
USDCNH/CNY Spot: Back to 7?
In the past October, spot trended lower overall driven by synergic factors like dollar index retracement, widening spread of China-US government bond yield and most importantly positive sentiment from US-China phase-1 expectation and delayed December tariffs. Talks of including currency pact as part of trade deal triggered knee jerk reaction of spot selling, which market awaits further details. Technically, spot now is likely to revisit range band support of 7.0 but not mature enough to determine the trend reversal yet.
USDCNY fixing was more reactive into the second half of October than September. However, PBOC’s intention to stabilize the market sentiment is still at play. We also observed that the timing of increased fixing volatility is concurrent with CNY/CNH strength or reduced depreciation pressure when fixing is gradually above the level where USDCNH/CNY spot traded.
RMB CFETS Basket Index weakened in October creating the lowest print since index inception. This reflects fact that RMB is lagging other major non-USD currencies, especially EUR and Asia FX like TWD, KRW. To express the trading view that CFETS Basket index could go higher from here, traders could manually mimic the index portfolio using the published component weights.