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Market Analysis

Fundamental Analysis: More Small Gains for the Offshore Yuan

February 27, 2019
BY Michael Stark

The offshore yuan renminbi has continued its gains against the dollar today although more slowly than before. A wide variety of factors are at work here, but arguably the most important is the news and analysis of Sino-American trade talks.

USDCNH is currently trading slightly below ¥6.68, which is a low of around seven months. However, this is a minimal decline from the levels at which this symbol started the week.

Trade talks, data and rates in traders’ sights

One of the most important factors driving gains for the offshore yuan since last week has been increasing positivity at trade talks in Washington. The initial aim of securing a delay to tariffs due for implementation on Friday has succeeded.

This gave CNH a significant boost because of markets’ perception that China has more to lose from a protracted trade war. President Trump hailed what he called ‘substantial progress’ in the talks, reducing somewhat the risk premium associated with uncertainty over tariffs.

Chinese data has on the whole been mixed recently. This month’s releases of trade balance, exports and monthly inflation all beat forecasts slightly. On the other hand, yearly inflation and producer prices are down.

As is usual for USDCNH, rates are a major consideration. Reports from Reuters last week that the People’s Bank of China views a rate cut as a ‘last resort’ were positive for the yuan. This is because such a measure appears to be unnecessary. A stronger yuan – onshore and offshore – is not in itself a bad thing for Chinese exports, which are growing. Furthermore, inflation in China has yet to show signs of slowing down significantly.

Recent comments from senior members of the USA’s Federal Reserve System have created some pressure on USDCNH as well. Jerome Powell reinforced the Fed’s ‘patient’ approach to hiking rates yesterday. Based on these comments and reports, the current differential of 1.85-2.1% seems to be here to stay even after the Fed’s meeting on March 20.

PMI data releases are key this week

Tomorrow and Friday feature releases of three different purchasing managers’ indices:

  • Thursday, 01.00 GMT: official manufacturing PMI. Consensus 49.5; previous figure 49.5
  • Thursday, 01.00 GMT: non-manufacturing PMI. Consensus 54.5; previous figure 54.7
  • Friday, 01.45 GMT: Caixin manufacturing PMI. Consensus 48.5; previous figure 48.3

Of these releases, the official figure from China’s National Bureau of Statistics is the most likely to generate significant volatility for USDCNH. If the forecast indicating contraction is correct, this would be the third successive month of decline in Chinese manufacturing activity.

Traders are also likely to be looking at tariffs: markets are keenly anticipating more news of when the American and Chinese leaders might meet. Last but not least, the aftermath of Donald Trump’s meeting with Kim Jong Un in Vietnam has the potential to spur demand for havens such as gold at the expense of the dollar.

CNH’s direction depends on data

Based on current fundamentals, more small gains for the offshore yuan are probably the most likely outcome this week. However, these depend to a large degree on manufacturing data. Given the overall lack of consistency from February’s data so far, traders might expect more direction to come from the releases tomorrow and on Friday.

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