Muted Reaction as Chinese Rates Reach Fresh Record Lows

On Monday 21 October, the People’s Bank of China (‘PBoC’) cut rates more than had been expected in an attempt to support the Chinese economy. There was a consensus in the days before that cuts would occur despite indications last month that further loosening was unlikely. This article summarises recent news and data from China then looks briefly at the charts of USDCNH and HK50.

While the overall picture for China’s economy isn’t desperate, it’s also not positive. GDP has struggled in the last several quarters while inflation has also remained low:

The end of deflation at the beginning of 2024 was a positive sign that the coming recession, if any, is probably neither imminent nor likely to be very severe. However, annual headline inflation has been below the consensus consistently for several months, which is one of the factors spurring the PBoC into action. Trade has remained generally strong:

The pattern of China’s balance of trade in 2024 has been consistent with the last several years but showing generally higher figures. The big decline towards the end of the first quarter is seasonally normal. Data on imports specifically show that domestic demand is somewhat fragile, one factor contributing to higher net figures for trade.

Both the PBoC and the government of China are keen to preempt any potential recession or significant further slowdown. That’s likely to be positive in the medium to longer term for the yuan and many blue chip shares in China, especially in the context of renewed fears of inflation resurging in the USA and other large, advanced economies. Calling more cuts on 20 November seems questionable, but news of the property market in China and domestic consumption will be important in the next few weeks.

Dollar-yuan, Daily

Beyond recent changes in monetary policy, the yuan has received some support from news that major Chinese banks have been actively selling dollars to try to support the currency. The market is waiting for further details on the fiscal stimulus announced last month.

The 38.2% weekly Fibonacci retracement around ¥7.11 seems likely to hold as a short-term support in the next few days unless significant news reaches markets or there’s further clear strengthening by yields from American bonds. The bounce from below ¥7 at the end of last month was quite vigorous and supported by volume; this would usually suggest the possibility of an ongoing uptrend. The golden cross of the 20 SMA above the 50 from Bands came with a fairly high angle.

Now that there’s some evidence of buying saturation, though, further immediate gains seem less clear. It’s still a fair way to go to reach the 23.6% Fibonacci retracement and the 100 and 200 SMAs are likely to be dynamic resistances to some extent before that. Consolidation seems to be possible ahead of American GDP on 30 October, but beyond that ongoing gains seem possible if the data support them.

Hang Seng, Daily

HK50’s volatility has calmed down somewhat in the last fortnight as the initial reaction to news of fiscal stimulus seemed to be too aggressive. Sentiment has worsened somewhat: traders are wary of competition in technology between China and the USA regardless who wins the upcoming presidential election while property-related shares have struggled with doubts about the efficacy of stimulus.

Technically, though, this is a pretty normal reaction to major unexpected news, just over a significantly higher period. The Hang Seng has retraced about 50% from 7 October’s high and moved slightly into oversold based on the slow stochastic. It looks like a good entry for confident buyers but a more cautious trader might want to monitor the next interaction with the 50 SMA from Bands coming up in (probably) early-mid November.

Next week sees the releases of many critical earnings reports from Chinese companies, most notably banks. Even those not listed in Hong Kong will likely have some impact on HK50. Thursday 31 October is probably the most important day for the next direction of the Hang Seng.

This article was submitted by Michael Stark, an analyst at ExnessExness.

The opinions in this article are personal to the writer. They do not reflect those of Exness or FX Empire.