The only chart to watch: EUR CNY (or why 1.1000 buyer is probably China)

Is it total random that China have "allowed" weaker CNY ever since QE from Europe was announced?

 

Is it likely China in real terms is bidding 1.10 EURUSD / selling 1.40 or 1.35 to manage their massive reserves?

 

Is the FX war in feel speed now?

 

Answers – correct ones :

 

No, Yes, Yes….

 

EURCNY chart from Bloomberg  - model (hat-tip: Matt) is daily…

 

 

Underneath this the CAPITAL account in China has moved into deficit – Correct, deficit despite record high trade surplus (…and the very reason why China was biggest issuer of US Dollar debt in 2014)

 

Link: Capital account shift into the red  (China Daily)

 

 

This morning PBOC move the fixing to outside the band for 1^st time in 21 month, in move "designed" to keep Yuan stable and limit volatility in capital flows. LINK, but market still sees further measure both of which will mean weaker CNY, according to the link from Bloomberg the two options are: A widening of the Yuan trading band and guiding the exchange rate lower by adjusting the fixing against the greenback. In typical Chinese fashion they start by a "head-fake" the other way (as any old fashioned market maker would do it… J)

 

The bigger issue for China is the US dollar funding dependence both to close the capital account deficit, but also as a potential "margin call" on China….if US dollar goes outside 1.10 EURUSD level, which is why I believe China is the big buyer below and with a vested interest.

 

The bottom line is…. China has have gained 5% vs. EUR since start of the year – meaning EUR CNY now moving more than USD CNY (YTD: -0.5%) – the new conclusion becomes: China will keep CNY stable, but buy EURUSD here for reserve management purpose, if this does not steady EURUSD, then they will allow further widening of band. Remember a currency trade have two parts – China seems to have decided on moving on EURO before CNY – for now…

 

Safe travels,

 

Steen

 

PS: Of course if its 1.10 or 1.05 is for China to decide but generally they use technical analysis to find support and resistance levels.

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

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