Group Economics Macro & Financial Markets Research
50 40 02 December 2016 30 20 10 0 -10 -20 -30 Jan-12 Jan-13 Jan-14 Jan-16 Jan-10 US dollar Jan-11 profit taking as gains deemed probablyJan-15 overdone
US dollar strength…time for a breather
Roy Teo Senior FX Strategist Tel: +65 6597 8616 firstname.lastname@example.org
China FX reserves expected to decline November… Change in full time jobs '000in3mth avg (rhs) …measures to Change address yuan outflows inspeculative labor force '000 3mth avg (lhs)
US dollar profit taking as gains deemed probably overdone At the time of writing, the US dollar index is set to close lower this week after rising by about 4% in the last three weeks. This is despite the fact that US economic data releases this week exceeded market expectations. Indeed technical indicators imply that the strength in the US dollar in recent weeks was probably overdone. Better than expected China PMI, a recovery in crude oil prices also supported risk sentiment in emerging market currencies. Sentiment in the Canadian dollar has also improved as economic growth in Canada rebounded strongly in the third quarter. Nevertheless, we expect the Canadian dollar strength to face strong resistance around the 1.301.32 region. The euro rose to almost 1.07 as Italian bond yield spreads against German Bunds narrowed. The latter was due to a report from Reuters stating that the ECB is ready to step up purchases of Italian government bonds if the outcome of Italian referendum this Sunday leads to a surge in bond yields. Unwinding of speculative short positions continue to push the Sterling to above 1.26 against the US dollar. Brexit Secretary Davis said that the UK could consider making contributions to the EU to secure the best possible access to the single market. This has alleviated market concerns of a Hard Brexit when the UK triggers Article 50 in early 2017.
The Japanese yen also received some support around the 115 level as exporters hedging activities pick up. Our assessment is that the weakness in the yen is stretched as implied by real interest rate differentials between the US and Japan. Indeed the currency options market demand to hedge against a weaker yen has reversed in recent days.
FX Flash - US dollar strength…time for a breather - 02 December 2016
China FX reserves expected to decline in November… China’s foreign currency reserves in November are expected to decline below the USD 3.1 trillion mark, the lowest level since March 2011. This is due to valuation effects (stronger US dollar in November) and narrow interest rate differentials between China and the US. Since 8 November (US Presidential elections), the Chinese yuan has declined from 6.78 against the US dollar to 6.92 before recovering to 6.88 in recent days. However against currencies of China’s main trading partners, the yuan has strengthened by about 1.5%. This implies that the yuan underperformance was mainly due to US dollar strength rather than yuan weakness. …measures to address speculative yuan outflows Nevertheless, Chinese authorities have started to crack down yuan capital outflows via false overseas investment activities via the ODI (Outward Direct Investment) channel. Though this is a difficult exercise, Chinese authorities have been relatively successful in closing the loop of ‘over invoicing’ via imports from Hong Kong. The People’s Bank of China is also said to tighten rules on onshore companies lending yuan offshore. Both onshore and offshore yuan interest rates have tightened recently, which is also expected to limit depreciation pressures in the yuan. Our 2016 and 2017 year end USD/CNY forecast is 6.90 and 7.15. This is not materially different from what is implied by one month (6.91) and one year (7.0960) nondeliverable forwards market.
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FX Flash - US dollar strengthâ€Śtime for a breather - 02 December 2016