Yuan Sinks Toward Limit Of Trading Range, Risking PBOC Pushback

Central Bank

Forex

Summary:

Yuan is close to weak end of allowed trading band vs. dollar.PBOC used to support yuan vigorously when it was this weak.

China’s defense of its currency is heading toward a milestone moment that may trigger a more forceful response from authorities to punish short-sellers.

Having weakened the yuan to within a whisker of its fixed trading range against the dollar on Wednesday, investors are now in danger of being slapped with anything from direct intervention to a dramatic liquidity squeeze in the offshore market. Over the past decade, the People’s Bank of China has stepped in aggressively to stabilize the yuan on each of the five occasions it neared that policy red line.

In constant conflict trying to keep policy loose enough to stimulate growth but the currency strong enough to avoid disorderly capital outflows, the PBOC has a tendency to react slowly then take sudden action. That translates to a tolerance of moderate yuan depreciation which can quickly shift to measures to boost the currency to prevent market panic.

“A continued slide in the yuan undermines both investor and consumer confidence, which in turn weighs on growth conditions and is counterproductive to authorities’ longer-term economic ambitions,” said Simon Harvey, head of foreign-exchange analysis at Monex Europe Ltd. “A similar playbook to late last year can be expected — quasi-intervention through state banks, regulatory tweaks and adjustments to liquidity conditions.”

Yuan Sinks Toward Limit Of Trading Range, Risking PBOC Pushback_1

Recent resilience in the dollar — a result of bets that the Federal Reserve will keep its policy rates higher for longer — is making the PBOC’s mandate even more difficult. Other Asian central banks, including those in Japan and Indonesia, are also faced with defending their currencies more aggressively after they sank to multi-decade lows.

On Wednesday, the yuan weakened to 7.2364 per dollar, within 0.01% of the edge of its permitted trading range.

Yuan History

Chinese policymakers have always been vigilant of currency depreciation pressure as it can easily spill over to local stocks and hurt the appeal of bonds. A rapid yuan drop can also lead to a vicious cycle of capital outflows and exacerbate currency losses, like it did after a shock devaluation in 2015.

That’s why the PBOC keeps a tight leash over the yuan with its daily reference rate and fixed trading band for the currency. Onshore, the currency is only allowed to move 2% above and below the so-called fixing that’s released by the central bank on every trading session.

Alex Loo, a macro strategist at TD Securities, said the PBOC may order state banks to sell dollars imminently or boost the cost of making bearish trades against the yuan if the currency keeps falling.

“The PBOC is likely sending a strong signal to investors that it has little tolerance for further weakness,” Loo said. “Without any change in guidance from higher-ups, they are likely to stick to their ‘stable yuan’ mandate for now.”

Yuan Sinks Toward Limit Of Trading Range, Risking PBOC Pushback_2

Since the most recent tweak of the band in 2014, the yuan has never moved outside of its permitted range. This week, it moved to just 0.01 percentage shy of the weak end of that threshold.

In previous cases where the yuan got this close, the PBOC has pushed back with aggressive measures. Apart from a sharply stronger fixing, it also adopted tools like verbal warnings, capital curbs and even dollar sales by state banks.

Yuan Sinks Toward Limit Of Trading Range, Risking PBOC Pushback_3

The downside is these measures carry a high reputational cost, hindering aspirations to make the yuan a more international currency.

No Panic

Analysts agree that the PBOC will manage the yuan closely to prevent it from touching the trading band and that there has been no sign of a panic selloff. Demand for bearish bets in the options market remained muted and expected swings are still among the lowest in Asia, according to data compiled by Bloomberg.

An action from Beijing can’t be ruled out if hawkish comments from the Federal Reserve or upbeat US economic data fuel further gains in the dollar. China’s onshore foreign-exchange markets will be closed for a holiday on Thursday and Friday.

“The PBOC will defend its 2% band for now — the recent fixing has shown clearly that PBOC wants to dispel speculation about this mini devaluation,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp Ltd.

Source：Bloomberg

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Zi Cheng

Traders' Opinions

Commodity

Fundamental Analysis

After reaching record highs near $2,290 during Wednesday's European session on various positive factors, the price of gold (XAU/USD) experiences a decline. Near-term demand for the precious metal remains strong due to escalating geopolitical tensions in Eastern Europe and the Middle East, which drive investors toward safe-haven assets like gold. Despite the increase in bond yields and diminishing expectations for Federal Reserve (Fed) rate cuts in June, geopolitical uncertainties continue to support bullion prices.

The 10-year US Treasury yields surge to 4.37% as Fed policymakers express confidence in the robust economic outlook and tight labor market conditions. Cleveland Fed Bank President Loretta Mester emphasizes the importance of not rushing into rate cuts, stating, "I think the bigger risk would be to begin reducing the funds rate too early." The Fed's reluctance to cut rates could further tighten the labor market, potentially leading to increased wage growth and inflation. Typically, higher bond yields reduce the attractiveness of gold as an investment due to the higher opportunity cost associated with holding the precious metal.

The focal point of the week will be the release of United States Nonfarm Payrolls (NFP) data on Friday. This labor market report will shape market expectations regarding potential Fed rate cuts in June.

The upward momentum in gold prices persists amid heightened geopolitical tensions, bolstering the demand for safe-haven assets while the US Dollar retraces from recent four-month highs. Escalating geopolitical uncertainties prompt investors to seek refuge in assets like gold.

In Eastern Europe, ongoing drone attacks launched by Ukraine against Russian oil refineries have exacerbated tensions between Moscow and Kyiv. President Joe Biden voiced concern over Ukraine's targeting of Russia's oil infrastructure, warning of potential severe repercussions on global oil prices.

Technical Analysis

XAU/USD has been trading in an all time high price where we dont have any previous resistance to look for retracement opportunities. The only choice that we can rely on is the psychological resistance which is $2300 which is believed to be able to hold Gold for some time before propelling for new higher prices.

It is too risky to take long positions on XAU/USD now as there is no retracement yet for such an aggressive bullish move leaving lots of fair value gaps behind and we are too near to the psychological resistance. Let's remain patient for the retracement to look for long opportunities.

Escalating Geopolitical Tensions Propel Gold Prices to New All-Time Highs Just Below $2,300_1

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Alex

Economic

Stocks

A 7.2-magnitude earthquake hit eastern Taiwan earlier in the day, prompting tsunami warnings for nearby islands of southern Japan and the Philippines. It also raised concerns about possible disruptions to the vital chip-making industry.

The news sent stocks in Taipei down 0.6%, from a record high close in the previous session, and weighed on shares of global chipmakers. Shares of Taiwan Semiconductor Manufacturing Co slumped 1.3% after the semiconductor giant said some facilities were evacuated following the quake.

"There have been reports of halts to semiconductor production operations, and if these become more broad-based, we expect some constraints on production, in both Taiwan and the region, that could result in upstream pricing pressures in the chip sector," Barclays analysts said in a client note.

Equities in Seoul plunged 1.7% to a two-week low, dragged down by chip and battery stocks. Those in Manila, Singapore and Jakarta fell between 0.7% and 1.2%.

Singapore Telecommunications, Southeast Asia's largest telecom operator, fell nearly 4% after the company confirmed there was no impending deal to divest its Australian telecom unit Optus.

A recent strong run of US economic data releases raised doubts on whether the Federal Reserve will follow through with 75 basis points of rate cuts this year and favoured the dollar.

The dollar index was last seen steady at 104.78, a touch down from the five-month high of 105.10 hit on Tuesday.

The broad-based dollar strength accentuated the pre-existing downside tendencies in the Japanese yen, Mizuho Bank's Vishnu Varathan said.

The yen was trading at 151.67 per dollar, hovering near last month's slump to 34-year lows of 151.975 after the Bank of Japan's historic policy shift.

The Philippine peso slipped 0.3%, while South Korea's won edged 0.2% higher. The Indonesian rupiah depreciated 0.2% to 15,920 per dollar, hovering very close to a four-year low of 16,000.

The cabinet of Thailand, Southeast Asia's second-largest economy, on Tuesday approved a plan to raise its budget deficit next year despite a worsening fiscal position and higher outflows.

"Government plans to widen the fiscal deficit to 4.4% of GDP in FY2025 from 3.6% won't help with getting back investor confidence," MUFG analysts said. "Tensions between the government and BoT over where the policy rate should be, along with unattractive yields, have reduced the allure of holding the THB."

The Thai baht, among the worst performers in Asia so far this year, has dipped 0.2% and was set for a three-day losing streak, if current trend holds.

Oil prices edged higher on an escalation of geopolitical tensions and a larger-than-expected fall in US crude inventories, raising fears about fiscal stability for net oil importers in Asia.

Among other emerging markets, Chile's central bank cut its key interest rate by 75 basis points to 6.50% on Tuesday, after lowering it by 100 basis points in January. Peso was unchanged at 973.93 against the US dollar.

Source：Reuters

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Thomas

Economic

Indian Economy GDP growth seen at 7.5% in 2024! The World Bank has projected that the Indian economy is set to grow at 7.5 per cent in 2024, marking a revision from its previous forecast by 1.2 per cent. This growth is part of a strong outlook for South Asia, with the region expected to grow at 6.0 per cent in 2024, driven by India's strong growth and recoveries in Pakistan, and Sri Lanka.

According to a PTI report, the World Bank's South Asia Development Update states that South Asia is poised to maintain its status as the fastest-growing region globally for the next two years, with a projected growth of 6.1% in 2025.

The World Bank has highlighted that India will be a major contributor to the region's economy and it is expected to see output growth of 7.5% in FY 2023-24, followed by a moderate decrease to 6.6% in the medium term. According to the World Bank, activity in services and industry is expected to remain robust.The report also mentions positive signs in Bangladesh and Sri Lanka, with expected growth rates of 5.7% and 2.5% respectively.

Martin Raiser, Vice President for South Asia at the World Bank has expressed optimism about the region's growth prospects in the short term but has cautioned about challenges such as fiscal vulnerabilities and climate risks.Franziska Ohnsorge, Chief Economist for South Asia at the World Bank, emphasized the need for policies to enhance private investment and employment growth to leverage the demographic dividend.

India's economic performance in Q4 of 2023 exceeded expectations, with a growth rate of 8.4% driven by investments and government spending. The country's composite Purchasing Managers Index (PMI) stood at 60.6 in February, well above the global average, indicating a strong expansion. Inflation in India has been within the Reserve Bank's target range, supported by stable policy rates since February 2023.

Financial conditions in India have remained favorable, with domestic credit issuance growing by 14% year-on-year in December 2023. The nonperforming-loan ratio has decreased to 3.2%, and regulatory capital adequacy has surpassed requirements. Despite a decline in FDI, foreign portfolio investments have increased, leading to a rise in foreign reserves.

Looking ahead, the World Bank projects India's output growth to reach 7.5% in FY 2023-24, followed by a moderation to 6.6% in FY 2024-25. The slowdown is attributed to a decrease in investment growth from the previous year's high levels. However, the bank expects robust growth in services and industry sectors, supported by construction and real estate activities.

In the medium term, the report forecasts a decline in fiscal deficit and government debt, backed by strong output growth and government consolidation efforts. The overall outlook suggests a positive trajectory for India's economy, with the potential for growth dividends from public investments in the coming years.

Source: TOI

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Zi Cheng

Economic

Traders' Opinions

In March, Eurozone inflation dropped to 2.4 percent, falling below expectations and reinforcing the likelihood of interest rate cuts by the European Central Bank (ECB) before summer.

March Sees Eurozone Inflation Drop to 2.4%_1

The decline in annual consumer price growth from 2.6 percent in the previous month was attributed to smaller increases in food and goods prices, offsetting stable services prices. This information was revealed in data released by the EU statistics office Eurostat on Wednesday. Economists surveyed by Bloomberg had projected a March figure of 2.5 percent.

The alleviation of the region's significant cost-of-living challenges, which have been among the most severe in a generation, will likely be welcomed by the ECB. The central bank is scheduled to convene next week to deliberate on the timing of monetary policy adjustments. While most analysts anticipate a delay until June to initiate rate cuts, concerns persist among policymakers regarding the ongoing influence of rapid wage growth on costs in the labor-intensive services sector. Prices in this sector have maintained a steady annual increase of 4 percent for the fifth consecutive month.

Diego Iscaro, an economist at S&P Global Market Intelligence, noted that the March decrease in headline inflation "could heighten expectations for a rate cut later this month." However, he suggested that the ECB may opt to wait for further evidence of easing wage growth before commencing the easing cycle in June, given the persistent stability of services prices.

Certain economists had anticipated a rise in eurozone services inflation for March due to Easter occurring earlier in the year, which was expected to elevate prices of package holidays and flights.

Core inflation, which excludes energy and food prices to provide a clearer insight into underlying price trends, declined slightly more than economists had predicted, reaching 2.9 percent in March compared to 3.1 percent in February.

March Sees Eurozone Inflation Drop to 2.4%_2

Since its peak of 10.6 percent in October 2022, eurozone inflation has dropped significantly, following the disruptions caused by the coronavirus pandemic and Russia's invasion of Ukraine, which led to one of the most substantial price surges in decades. This decline has brought it remarkably close to the European Central Bank's target of 2 percent.

Despite this, senior ECB officials have indicated a preference to wait until June before considering potential rate cuts, allowing more time to assess whether wage pressures are moderating sufficiently to sustain the downward trajectory of inflation toward their target.

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Ukadike Micheal

Economic

Stocks

In the early hours of Wednesday's trading session, the Gulf stock markets experienced a mixed performance, characterized by declines in most markets and a notable rise in the Saudi index. This divergence in market behavior was largely influenced by investors' apprehension regarding the US Federal Reserve's stance on interest rates. Recent indicators of robust economic activity in the United States have fueled speculation that the Fed may opt to delay its anticipated rate cuts, leading to uncertainty and cautious trading sentiments across the Gulf region.

Given that many Gulf currencies are pegged to the US dollar, any shifts in US monetary policy typically reverberate across the Gulf markets, particularly in Saudi Arabia, the United Arab Emirates, and Qatar. This interconnectedness underscores the significance of developments in the US financial landscape for Gulf investors and market participants. As a result, the possibility of the Fed postponing interest rate cuts has prompted investors to reassess their positions and adjust their strategies accordingly.

In Dubai, the benchmark stock index registered a marginal decline of 0.2%, driven partly by a downturn in prominent entities such as Emaar Properties and Commercial Bank of Dubai. These declines reflect the cautious sentiment prevailing in the market as investors react to evolving macroeconomic factors and geopolitical developments. Similarly, the Qatari benchmark index experienced a modest decrease of 0.2%, with notable losses observed across various sectors, including the financial industry.

Meanwhile, the Abu Dhabi market exhibited relative stability, with the benchmark index maintaining its position. While certain stocks, such as Aldar Properties and Alpha Dhabi Holding, witnessed marginal declines, others, such as Presight and ADNOC Drilling, saw notable gains. This mixed performance underscores the nuanced nature of market dynamics, with individual stock movements influenced by a myriad of factors, including company-specific developments and broader market sentiment.

Conversely, Saudi Arabia's benchmark stock index demonstrated resilience, advancing by 0.6% despite the prevailing uncertainties. The positive momentum in the Saudi market can be attributed to gains across almost all sectors, with notable contributions from entities such as Rajhi Bank and Saudi National Bank. These gains reflect investor confidence in the resilience of the Saudi economy and its ability to navigate through challenging global economic conditions.

Furthermore, specific stocks such as Middle East Pharmaceutical and Saudi Telecom witnessed substantial gains, highlighting pockets of strength within the market amidst broader volatility. These performances underscore the importance of thorough market analysis and stock selection in navigating turbulent market environments.

The early trading session in the Gulf markets reflects the intricacies of investor sentiment and the interconnected nature of global financial markets. While concerns regarding US monetary policy weigh on investor confidence, regional markets demonstrate varying degrees of resilience and vulnerability. Amidst these dynamics, investors must remain vigilant and adaptive, leveraging insights from both macroeconomic trends and individual stock performance to make informed investment decisions.

Source: Reuters

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Cohen

Economic

Consumer inflation quickened to 68.5% in March, slightly less than expected by analysts but up from 67.1% in February. The median estimate in a Bloomberg poll of economists was 69.1%.

Services, education and food were among the key contributors. Core inflation, which strips out volatile items like food and energy, quickened to the highest on record to 75.2%, up from 72.9% in February.

Monthly inflation — policymakers’ preferred gauge — slowed to 3.16% from 4.5% the previous month and recorded the lowest reading since December.

Istanbul-based economist Haluk Burumcekci said the deterioration in pricing following the sharp hike in minimum wage at the start of the year and stickiness in services inflation continued.

The data comes after the central bank surprised markets by raising its benchmark interest rate to 50% in late March, amid the deteriorating inflation outlook and increased demand for hard currency. The bank has vowed to maintain a tight stance until prices show visible signs of cooling.

The lira was trading 0.2% higher at 10:36am local time on Wednesday, and is set for a third day of straight gains. The currency was the worst performer across emerging markets last month, weakening 3.5% against the US dollar. Turkey’s government bonds also extended gains after Wednesday’s data.

Policy continuity

President Recep Tayyip Erdogan suffered an unprecedented defeat in local elections on Sunday, with Turkey’s cost of living crisis contributing to the opposition winning in key cities such as Istanbul and Ankara.

With elections out of the way, investors are watching for further signs of continuity in monetary policy and stronger fiscal discipline. Deutsche Bank AG analysts are particularly looking for any potential adjustments to energy tariffs and fiscal consolidation steps, which could impact inflation’s trajectory.

Shortly after the data release, Finance Minister Mehmet Simsek said that fiscal policy would also be tightened with control over government spending, excluding costs related to last year’s deadly earthquakes. This, together with monetary policy tightening, “will together anchor inflation expectations and contribute to the disinflation process,” he said on social media platform X.

“We will do whatever it takes until we achieve our primary aim of price stability.”

The central bank sees inflation ending this year at 36% with an upper band of 42%, according to its latest projections.

Conceding defeat after Sunday’s vote, Erdogan signalled he would stick to the orthodox economic program led by the finance minister.

“We have implemented our medium-term program with determination. We have stayed away from populist steps that would put a burden on our country, nation and future generations,” the president said. “We will begin to see the positive results of our economic program, led by improvements in inflation.”