ATFX Review: Fluctuations in market prices are always breaking established economic principles. When money is regarded as a commodity, when the supply decreases and the demand remains unchanged, the price will naturally rise. For the dollar, the Fed has been in the tightening monetary policy phase since last November, and is expected to announce a rate hike at the March interest rate decision meeting, which represents a tightening of the supply side of the dollar. The People's Bank of China also lowered the one-year LPR benchmark interest rate from November last year, and today it has lowered 10BPs, indicating that the supply side of the renminbi is expanding. Under the divergence of Sino-US monetary policy, according to the analysis of economic principles, the dollar should appreciate and the renminbi should depreciate. However, the actual price action is a steady decline in USDCNH, and the decline means that the offshore renminbi continues to appreciate against the US dollar.
One explanation is that prices may deviate from macro guidance over a short period of time, similar to prices fluctuating up and down around value. When we extend the cycle to several years, this deviation is automatically corrected, which is what Buffett calls value regression. This explanation is the most reasonable, but it is also the most difficult to achieve, because there are too many variables in the time of "years" and it is too difficult to hold firmly, and many people cannot do it. Another explanation is relatively simple, that is, the trading volume of USDCNH is low, the liquidity is insufficient, and the degree of marketization is not deep, so it cannot accurately reflect the changes in monetary policy. Under this explanation, the trend of USDCNH is not closely related to monetary policy, but is more affected by regulatory intentions. At present, the offshore RMB does not depreciate, mainly due to the depreciation of funds WL, appreciation will inhibit exports, so keeping the offshore RMB price fluctuating in a reasonable range is the basic guiding principle. Based on this, our medium-term judgment on USDCNH is a moderate range oscillation for ups and downs. Neither will it break 7, nor will it break 6.
TECHNICAL ASPECTS OF USDCNH
Courtesy of ATFX
The shock has already begun, and USDCNH has been running around that level since it hit 6.3687 on October 19 last year. The current support is at the previous low of 6.33 (black horizontal line), the resistance is at the stage high of 6.40, and the USDCNH is fluctuating within these 700 standard points. In fact, for EURUSD, 700 points is indeed high (1 point represents $10), but for the offshore yuan, 1 point only represents 10 yuan, and there is a gap of about 6.5 times between the two, so it is not too high. From the short-term trend point of view, the current USDCNH is in the downward band, there is a possibility of impacting the support level of 6.33. However, the probability of this shock is higher than the length of the false breakout, first, because macro monetary policy does not support this breakthrough, and second, the USDCNH-driven downward wave has ended, and it is now at the end of the bearish trend, the so-called "end of the strong crossbow, the momentum can not penetrate the Lu Miao".
China's 10-year Treasury yield
Treasury yields never lie, they are fundamental indicators of the stage of an economic cycle. In October last year, the yield of the 10-year Treasury bond was 3.062%, but on January 20 this year, the yield was only 2.725%, and the decline was very sharp. Bond market interest rates will lead to a simultaneous decline in credit market interest rates, and lower credit rates will help alleviate the debt service problems in various industries. A typical example is the real estate industry of China Evergrande, which has no major problems in the quality of the houses it builds, but the credit funds are too large, close to two trillion yuan in scale, and the financial leverage is extremely high. If the interest rate on credit funds is not reduced, those enterprises whose financial leverage is not as high as China Evergrande' but whose absolute value is not low may face the same outcome as China Evergrande. Therefore, the rapidly decreasing interest rate on government bonds has a positive effect on the steady recovery of the macroeconomy. However, from a monetary point of view, USDCNH will have more upward momentum (the upward momentum of the US dollar against the renminbi).
Summary: The ATFX analyst team believes that China's GDP growth rate in 2021 will be 8.1%, which is much higher than the growth rate of other major economies in the world. China's economy is full of resilience and good prospects, and the current downward pressure is only temporary and can certainly be cured by counter-cyclical adjustment. In the long run, there is no basis for a sustained depreciation of the renminbi.
ATFX Risk Warning and Disclaimer: The market is risky, investment should be cautious, the above content only represents the analyst's opinion, and does not constitute any operational advice.
This article originated from the financial world