Chinese Yuan, New Yuan Loans, Inflation, Monetary Policy -Talking Points
- Asia Pacific Markets set for potentially quiet day ahead of US CPI figures
- Chinese credit growth in focus as new Yuan loans on tap for today’s session
- USD/CNH’s overnight weakness looks set to continue on Yuan strength
Thursday’s Asia-Pacific Outlook
Asia Pacific markets look set for a relatively low volatility trading session on Thursday ahead of the United States inflation print, which could very well affect global sentiment given the potential impact on Federal Reserve policy. Stocks slipped on Wall Street Wednesday and volatility ticked higher via the VIX “fear gauge” index. The Dow Jones Industrial Average (DJIA) shed 0.44%.
Investors are taking a cautious approach following several economic prints between the United States and China that may lead to a tighter monetary policy environment. The latest warning shot came Wednesday when China reported the highest factory gate prices in over a decade. According to the DailyFX Economic Calendar, China’s producer price index (PPI) saw a 9% Year-over-year gain for May.
The implications are concerning given China’s leading status as a goods exporter. Will Chinese manufacturers pass on the increased costs, which would likely spur additional inflationary pressures across import-hungry countries like the United States? Or, will Chinese factories attempt to eat the higher costs by sacrificing margins? The outcome is difficult to forecast, but markets should have the answers in the coming months.
That said, tomorrow’s consumer price index (CPI) for May will shed more light on the inflation story that the markets have been closely watching. Analysts are expecting the inflation rate to cross the wires at 4.7%, up from the prior month’s 4.2% figure. Moreover, the core inflation rate – which strips out energy and food prices – is expected to come across at 3.4%, up from 3.0%. If inflation turns out higher than the forecasted numbers, it will likely fuel hawkish Fed bets and push rate traders to sell Treasuries, which would push yields higher and likely pressure equity markets in turn.
Speaking of monetary policy, today’s session will see China release new Yuan loans for May, with analysts expecting 1.41 trillion Yuan in new loans, down from 1.47 trillion Yuan in April. The modest expected reduction in credit reflects China’s cautious approach to roll back the amount of lending in the country while at the same time supporting the still fragile recovery. The Yuan weakened overnight versus the US Dollar.
USD/CNH Technical Outlook:
USD/CNH pivoted lower from its 20-day Simple Moving Average (SMA) overnight, with prices now attempting to break below the 38.2% Fibonacci retracement level. A bearish SMA crossover earlier this week may be adding to overhead pressure on the currency pair. A 3-year low in late May is not far below the current price, which if broken, could see Yuan strength accelerate further.
The 20-day SMA is the most immediate area of likely resistance, with a 2014 trendline channel slightly above the descending moving average. The MACD oscillator continues to trend above its signal line toward the center line while the Relative Strength Index (RSI) drops toward its “oversold” 30 level. Overall, further downside for USD/CNH appears to be on the cards.
USD/CNH Daily Chart
Chart created with TradingView
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--- Written by Thomas Westwater, Analyst for DailyFX.com
To contact Thomas, use the comments section below or @FxWestwateron Twitter