The People’s Bank of China sold repos for the first time in 2013, and first time in 8 months last week in its bid to strengthened the Yuan. Previously, PBOC has been injecting liquidity into its financial systems by buying repurchase agreements – which was the choice route of intervention, unlike the US which were buying Treasuries outright. Other than using repos, PBOC has been gently guiding Yuan’s appreciation with USD/CNY daily fixes getting lower for the past few days. All these are scaring investors and analysts into thinking that PBOC might be tightening its monetary policy in 2013.
Analysts are starting to think that China may even resort to raising interest rates in 2013 which was totally unthinkable in 2012, when everybody was criticizing PBOC for not doing enough intervention to soften the “hard landing”. Thankfully the hard landing did not happen, but instead we are looking at a 2013 official forecast of around 7.5% growth – much lower than the decade before but still pretty decent. As such, the possibility of rates hiking does not seem to be as improbable as before.
Premier Xi Jingping has also said that China will loosen the grip on Yuan during his term, and wish to see internationalization of Yuan in the near future. Perhaps PBOC is simply allowing Yuan to appreciate to its natural equilibrium on their terms, which will make Yuan more palatable for more countries.
USD/CNY still looks to be on a multi-year downtrend despite price taking a breather back in 2012. Current price levels is below the 2012 average, and Stochastic readings appear to be forming a interim peak which suggest further strengthening for the Yuan. It is also worth noting that Ichimoku cloud was a strong resistance against Yuan weakness early 2013, and current Kijuu-Sen (Red line) acts as further resistance against any USD/CNY upside.
If speculation of Yuan’s rate hike gain traction, the possibility of USD/CNY breaking the consolidation zone it’s in currently increases. However, the ball remains firmly in PBOC’s court as price is unable to move more than 1% from the daily guidance level. If PBOC does not allow the CNY to move, there’s very little the market can do.
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