Week In FX Asia – PBoC Sets Yuan Fix Higher

S&P did not limit its focus to Russia on Friday. The rating agency noted that China shipbuilding, metal, mining and building material companies are vulnerable to defaults.

“A slowing economy and tough operating conditions in some leveraged industries facing cyclical downturns and overcapacity will lead to more missed payments” noted the agency.

However on the positive side, S&P does not see a “Lehman moment” because banks are predominately funded with retail and business deposits. However, it cannot rule out distress and credit losses over the next couple of years. Markets can expect Beijing to continue to support the financial system (especially banks) at least until authorities can administer orderly closings of troubled entities.

Last week’s Q1 GDP report from China was significant, it not only revealed a slowdown in GDP growth to +7.4%, but also indicated that economy wide inflation slumped further towards outright “deflation.” There is a fear that deterioration in Chinese economic data will lead to exporting deflation via unavoidable Chinese currency devaluation.

The RMB is ending the week on a sour note, extending losses despite the PBoC setting the yuan fix stronger for the third consecutive session. At one point during Friday’s intraday session the yuan happened to fall to its lowest level in 16-months. The central parity is set at 6.1576 vs. Thursdays 6.1589 (offshore NDF’s 6.2669). It seems that the PBoC is deliberately setting the rate higher to perhaps give the perception that they are not intently weakening the yuan. Dealers still expect the Yuan to remain weak in Q2 on concerns of China’s slowing economy.

WEEK AHEAD

* GBP Gross Domestic Product
* EUR German Consumer Price Index
* USD Consumer Confidence
* EUR German Unemployment Rate
* EUR Euro-Zone Consumer Price Index
* CAD Gross Domestic Product
* USD Gross Domestic Product
* USD Federal Open Market Committee Rate Decision
* USD ISM Manufacturing
* USD Change in Non-farm Payrolls
* USD Unemployment Rate

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell