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China’s FX Reserves Fell In February

China’s FX Reserves Fell In February

Forex News and Events

Proactive China good for market sentiment

China’s foreign exchange reserves fell by $28.57bn in February to $3.20trn according to official data released on Monday. FX reserves are now at their lowest levels since December 2011 after a four month consecutive decline. After heavy capital outflows and expectations for further yuan deprecation, indications suggest pressure is moderating. The PBoC set the USD/CNY fix lower at 6.5113, clearly providing additional propaganda by punctuating RMB strength (also further punishing yuan shorts). In addition, weakness in USD has allowed keep its pledge to guide the exchange rate with reference to a basket of currencies. We continue to anticipate limited CNY depreciation (but two-way price action). While speculation over the stability of China’s economic rebalancing management will not end any time soon, it’s unlikely in our view, that spillover will force CNY to levels not wanted by the PBoC. The central bank has made it clear that targeting CNY deprecation (to gain a competitive advantage) would not be their strategy. We understand the need to take official comments with a pinch of salt and to focus on real actions, however we also suspect that steadiness of the CNY is also in China’s best economic interests. Elsewhere, market sentiment improved as China’s National People’s Congress (NPC) signaled additional stimulus (although nothing major) and lowered 2016 growth target to 6.5% to 7.0% as was widely expected. The NPC also suggested heavier reliance on fiscal policy which would be “proactive” and “more expansionary” than trusting only monetary policy. We are more bullish on China than the majority of the market as we expect fiscal and monetary stimulus to lift China’s incoming data in Q2, surprising the bearish contingent and providing support for the stabilization of risk appetite.

Germany starts to suffer

German factory orders have declined for the second consecutive month printing at -0.1% m/m for January on global turmoil and weak domestic demand. Yet, December data has been revised up to -0.2% m/m. The recovery that is widely expected is not currently happening. Concerns are growing that the ongoing crisis may be deeper than suspected as it impacts Europe’s first economy.

At the same time, the German two-year yield keeps on declining at around -0.55% on the increasing likelihood that the ECB will increase its monetary stimulus on Thursday. Downside inflation pressures are also very significant due to low oil prices, even though the Brent keeps on bouncing further at $40 a barrel. Consensus appraises a 90% chance that the ECB will lower its deposit rate -0.4% and a 10% chance that the cut will be down to -0.5%. The single currency remains under definite pressure, even if we think that it should remain stable against the greenback, as disappointment towards the Fed keeps it at its current level.

Gold – Long-Term Reversal

Gold Long Term Reversal Chart

Today’s Key Issues

The Risk Today

EUR/USD EUR/USD is moving around 1.1000. The short-term technical structure still suggests a further bearish move. Hourly resistance lies at 1.1043 (04/03/2016 high). Hourly support can be located a 1.0904 (04/03/2016 low) then 1.0810 (29/01/2016 low). Expected to show continued weakness. In the longer term, the technical structure favours a bearish bias as long as resistance holds. Key resistance is located region at 1.1453 (range high) and 1.1640 (11/11/2005 low) is likely to cap any price appreciation. The current technical deteriorations favours a gradual decline towards the support at 1.0504 (21/03/2003 low).

GBP/USD GBP/USD is pushing higher. Major resistance is given at 1.4409 (19/02/2016 high). Hourly support can be found at 1.4108 (04/03/2016 low). The technical structure suggests further increase. The long-term technical pattern is negative and favours a further decline towards key support at 1.3503 (23/01/2009 low), as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200 day moving average). However, the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound.

USD/JPY USD/JPY‘s very short-term bullish momentum starts to fade Strong resistance is given at 114.91 (16/02/2016 high). Hourly support lies at 113.13 (04/03/2016 low). Next support lies at 112.16 (01/03/2016 low). Expected to show continued strengthening. We favour a long-term bearish bias. Support at 105.23 (15/10/2014 low) is on target. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems now less likely. Another key support can be found at 105.23 (15/10/2014 low).

USD/CHF USD/CHF is trading mixed. An hourly support now lies at 0.9879 (04/03/2016 low), while a key support stands at 0.9847 (16/02/2016 low). Hourly resistance is located at 1.0038 (29/02/2016 high) . In the long-term, the pair is setting highs since mid-2015. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours a long term bullish bias.

Resistance and Support

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