CNY/USD: Will China’s Economic Super Heroes Stoke Demand This Quarter?

Disney/Marvel’s Avenger: Age of Ultron opened in China today and is on track to smash box office records. Beyond entertainment, China’s challenge is to get consumers and businesses to spend more money in all sectors of the economy. Following grinding data on industrial activity over Labor Day weekend, forex traders want to see the toil of Chinese central bankers produce demand.

Several key numbers out of China today were to reveal if the open market tools of the People’s Bank of China (PBOC) are providing the stimulus needed to boost business and consumer spending. Market volatility was high in the CNY/USD currency pair as traders waited to see if China’s superheroes swung into action and rescued the economy with its open market policy tools.

While China’s move to shift from foreign currency reserves – declining 110 billion yuan to 3.73 trillion yuan in the first quarter – to open market policy tools to steer the economy has been showing signs of working, today’s data missed expectations. China reported new loans in April of 707.9 billion yuan, falling short of analysts’ expected decline to 903 billion yuan. The efforts to cut interest rates and thus the cost of commercial lending to stoke demand showed progress in March when new loans rose to 1.18 trillion yuan, beating analyst estimates of 1.03 trillion yuan.  

The M2 money supply reached  a new high in April, after hitting a record of 127,530 billion yuan in March.  The broad measure of liquidity in the economy grew 10.1% over a year ago, versus 11.6% in March, missing forecasts of 11.9%.

A Red Herring

The PBOC hinted that the economy was not yet on track on the weekend when it raised interest rates for the third time in six months.  The CNY/USD pair fell to 1.6 on Monday, a level not seen since April 27^th when a decline in Q1 2015 industrial profits of 2.7% to 1.25 trillion yuan precipitated a drop to 1.605. The effects of more recent liquidity operations – this weekend’s 0.25 interest rate cut and the provision of cheaper credit to banks – will not show up in the economy before the release of May’s data.

Did Monday’s downturn factor in the negative sentiment for the week? Overall bearish sentiment in the CNY/USD currency pair was turning bullish ahead of the opening of the Asian forex markets today.

 

 

Yesterday, a tightening of Bollinger Bands to a narrow trading range signalled price action ready to break out. Since the mid-March price jump over 1.6 in the CNY/USD pair, a spike in the Relative Strength Index (RSI) to 70 has been faithfully lifting the price, followed by a sell off at the overbought signal over 70, a pattern we saw in overnite trading. This correlation became more sensitive in volatile morning trading with repeated spikes up towards 1.1613 on volatility bursts over 50. Any movement below 50 typically signals a price move downward. 

The upward price moves are not likely to close in on the May 1^st high of 1.621, which then declined to 1.6. The Labor Day weekend decline in the CNY/USD pair was a reaction to hard demand numbers, PMI data. China’s official PMI numbers, mainly representing large manufacturers, showed industrial purchasing activity unchanged from 50.1 in the prior month. However, HSBC’s Purchasing Manager’s Index, representing small- and medium-sized firms, showed a contraction to 49.2 from 49.6 in March. As we predicted on April 30^th, the tightening Bollinger Bands led to a trend reversal.