Why is China not following Fed rate cut and where will USDCNH go?

Macro 7 minutes to read

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.
Source: Saxo Bank, Bloomberg

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.

Source: Saxo Bank, Bloomberg

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.

Source: Saxo Bank, Bloomberg

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

Saxo Capital Markets HK Limited
Rooms 2001-02, 20/F York House
The Landmark
15 Queen's Road Central
Hong Kong

Hong Kong S.A.R

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract) and Type 3 Regulated Activity (Leveraged foreign exchange trading) licenses (CE No. AVD061). Registered address: Rooms 2001-02, 20/F York House, The Landmark, 15 Queen's Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.