China quelling CNY volatility

After another heavy selloff yesterday driven by China concerns means there is the potential for a short-term bounce today.

China
Source: Bloomberg

Markets are looking heavily sold on a range of market internal indicators with only 22% of stocks on the S&P 500 trading above their 200-day moving average. And there has been a bit of rally coming into US markets just before the close. The big question is whether this is only a “dead cat bounce” and traders may just be looking to sell into the rally. A lot of the long-term concerns around China have still not dissipated. Although even if there looks to be a bit of buying early in the Asian session today, the CNY fix and Mainland cash market open still have plenty of potential to derail such moves.

China appears to be taking a firm hand to quelling CNH volatility. Heavy buying of the offshore Renminbi CNH yesterday saw the CNH-HIBOR interbank overnight lending rate spike up to 13.4%. One aspect of this is to strengthen the CNH by direct buying, but these actions have also significantly raised borrowing costs for those looking to short the currency. Not only did this see the CNH strengthen 1.4%, but it is quite likely that the elevated borrowing costs may force a lot of FX short sellers to close out their positions as they become too expensive. The onshore CNY also strengthened 0.4%, and its close is generally meant to be a rough indicator for where the CNY midpoint fix should be set today at 12.15 AEDT.

In addition to this, the People’s Bank of China (PBoC) research bureau chief economist Ma Jun published a statement last night stating that the PBoC is targeting forming a mechanism that will “appropriately limit” daily CNY-USD volatility. Certainly, the moves in the HIBOR and CNH yesterday look focussed on achieving that task. Alongside this, Ma emphasised that the CNY exchange rate was in a period of transition from a direct USD peg to a currency basket. He stated that there will be better communication and accessibility to data to improve the market’s understanding of the PBoC’s interventions.

The key question for trade today is what will happen in Chinese equity markets. Despite the stability in the CNY fix yesterday, the dramatic selloff in Mainland equities still drove selling in global markets. If we see heavy state intervention in the Mainland equity markets alongside these new moves to prop up the CNY, then this could be the jump start needed to see a bit of buying come back into global equities – in the short term.

The ASX is looking to open slightly down from its close yesterday at around 4925, but importantly above the 4910 support level from August and September. It is looking to be another nasty session for materials and energy stocks with dramatic falls in commodities overnight. US copper producer Freeport-McMoran lost 20.3% overnight, and currently BHP’s ADR is pointing to the stock opening down 1.6%. On the more positive end, CBA’s ADR is pointing to a 0.9% gain and if we do start to see buying come back into the banks, the index could close in positive territory today. Of course, where the ASX closes will be very dependent on how the Chinese CNY and equity markets perform.

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