Renminbi Slides as PBoC Seen Dovish

Chinese markets have been more volatile in recent days as speculation on the next moves from the government and the People’s Bank of China (‘PBoC’) has increased. However, the Hang Seng overall has been basically neutral since last week. This article gives a general overview of recent data and events affecting USDCNH and HK50 then looks briefly at the charts of these symbols.

Although midpoint rates have generally been stronger than expected in recent meetings of the PBoC, both the annual and five-year loan prime rates are at record lows. Last month’s cut of 0.25% to the five-year LPR was the largest ever. Based purely on inflation data, the Chinese economy certainly does seem to be facing headwinds:

Even as most other major economies around the world have struggled with high inflation over the last few years, China has faced the opposite problem since last year of deflation. The offshore yuan’s performance since 2022 makes the typical reaction to the situation – just cut rates – much more difficult politically and economically. As China’s economy is dominated by exports, a somewhat weak yuan is desirable in many ways, but the rate of losses in the first three quarters of last year was challenging.

Taking a step back to look at GDP, the long-feared recession certainly doesn’t look likely to appear in the immediate future. On the contrary, the numbers are robust compared to many European countries and considering overall economic conditions and monetary policy globally:

The Chinese government is aiming for growth of about 5% in GDP this year. Based on last year’s total, that seems to be quite possible considering that demand for exports remains decent for the most part.

It’s going to be hard for the PBoC and the government to balance between avoiding an excessively weak yuan while also preventing further deflation while hitting the target for annual growth in GDP. The PBoC certainly seems confident based on rhetoric from recent meetings, so it’s a matter of time to see whether that’s well placed.

The main focus for traders in the near future is PMI: NBS and Caixin PMIs are due on 31 March and 1 April respectively. Looking further ahead, the next release of inflation is on 11 April, then 16 April is a critical day of Chinese data, with both the job report and quarterly GDP coming out at the same time, 2.00 GMT.

Dollar-offshore Yuan, Daily

USDCNH covered about half of last Friday’s spike on Monday and has continued to gain since. Volatility increased significantly since the end of last week, but it’s still unclear whether it’ll continue at similar levels or perhaps decline somewhat over the next few sessions. Either way, the uptrend is likely to remain active unless there’s a significant intervention by the PBoC or sentiment shifts notably.

The price is above all of the moving averages and in or very close to overbought based on Bollinger Bands and the slow stochastic. ¥7.30 seems to be an obvious medium-term target, being a round number and the area of mid-November 2023’s high. Beyond that, ¥7.35 is the area of the all-time high which probably won’t be broken for some time without a clear fundamental catalyst even if the uptrend continues.

There’s no very clear area of static support on this chart. ¥7.20 is a possibility based on the longest tails of last month’s periods, but it’s pretty vague. The 200 SMA might be an important dynamic support in the next few days, though. The focus next week is on Friday’s NFP after PMIs on Sunday and Monday.

Hang Seng, Daily

The Hang Seng is nearly unchanged from where it started the year. Some of the strongest gainers of the index in recent days have been JD and Meituan. However, Tencent Holdings, by far the largest constituent, is down around 20% since January. The latest earnings season in China wasn’t stellar although negativity has arguably been overstated in some media this quarter.

The long-term trend is definitely down, but on this daily chart there are some positive signs. The 20-day SMA golden crossed the 50 from Bands late last month and the 50 also seems to be about to move above the 100. It’s probably going to be very difficult to break through 17,200 because that’s the confluence of the 200 SMA and the latest closing high from 12 March.

In the context of the bounce since 23 January and the slow stochastic close to the zone of selling saturation, the current period’s engulfing candlestick seems cautiously positive. However, it’s normally less risky to wait for such a pattern to complete before acting on it. No significant earnings are coming up next week, so technical action is likely to dominate apart from around Caixin PMI on Monday.

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