CHINA MONEY WEEK: Techs Point To Further Yuan Outperformance

--Expectations of PBOC Easing Appear Priced Into The Yuan

By Stuart Allsopp

     SINGAPORE (MNI) - The technical outlook for CNH has improved over recent

weeks, relative to the dollar, the euro and broader Asian FX. While the ongoing

decline in bond yields pose a headwind to further yuan gains, further central

bank easing and even lower market rates would likely cushion the extent of

China's deleveraging cycle rather than trigger another inflationary surge in

bank lending.

     With this in mind, and with low oil prices providing direct support to

China's trade accounts, the balance of risks favours further yuan

outperformance, at least for now.

     --OUTPERFORMANCE 

     The yuan has outperformed over the past few weeks following the G20

meeting, despite renewed weakness in equity markets and a continued decline in

bond yields. USDCNH has held below its key 50-dma, EURCNH is looking to break

back below its 200-dma to complete a potential topping pattern, while CNHKRW

looks to be basing after hitting multi-year lows. 

     Technically, the potential for a rally is there, both versus the dollar and

in trade-weighted terms, suggesting that further easing by the PBOC may already

be priced in.

     --CALLS FOR MONETARY EASING

     There is growing speculation that the PBOC will deliver some form of easing

by end-2019. Professor Zhou Hao, associate dean at the PBOC School of Finance,

Tsinghua University, said in an interview with MNI on Dec 11 that the PBOC

should cut benchmark interest rates as early as this month to prevent a sharper

economic slowdown, arguing that monetary easing could actually reduce the

economy's debt ratios.

     In addition to making its first rates cut since October 2015, the PBOC

should also lower banks' reserve requirement ratios and pump in liquidity

through open market operations in a bid to reduce the costs of business's

financing and of mortgages as soon as possible, he said. The school was

previously a research institute responsible for training officials at the

central bank, and its current honorary dean is former Governor Zhou Xiaochuan.

     Zhou, who is also director of the Monetary Policy and Financial Stability

Research Center of Tsinghua University's National Institute of Financial

Research, also noted that the PBOC's three cuts in reserve requirement ratios

(RRR) and lower money market rates have not been enough.

     --LIQUIDITY SURGE UNLIKELY

     While monetary easing would act as a headwind for the yuan, recent money

supply data highlights the extent to which China's huge debt overhang is

tightening monetary conditions, with M2 growth coming in at just 8.0% y/y

despite a strong pickup in new loans.

     With this in mind, we would not expect lower rates or a RRR cut to reignite

a surge in bank lending and inflation, but rather cushion the extent of

deleveraging, preventing a surge in liquidity from undermining the yuan.

     --LOW OIL PRICES A KEY DRIVER

     At the same time, lower oil prices are likely putting downside pressure on

inflation expectations, as we have seen for other net oil importers over recent

weeks. The drop in oil prices is perhaps the most underappreciated positive

factor underpinning the yuan at present in our view, given the direct downward

impact this has on dollar outflows. The 20% y/y rise in the trade surplus in

November was partly driven by the import of lower energy import costs.

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com

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