The markets continue to shudder as political turbulence ferments, key tier one China data was just released which will offer little solace to risk sentiment as the GDP is 0.1% lower than what was expected by markets. Well, it doesn’t come as much of a surprise Chinas economy is losing steam, but there are worrying sings beyond the tariff effect that are more concerning. Specifically, that on year on year basis industrial output came in significantly lower. But it’s Friday after yet another tumultuous week, and frankly, I doubt anyone has a serious axe to grind at this point other than squaring positions into the weekend.
USDCNY fixed at 6.9387 today, +112 pips from last fixing and -22 pips from the previous closing at 6.9409 on 16:30 Beijing time and way lower than expectations sending the Yuan bears back their cage today. The fixes remain ambiguous and perhaps so my design to keep the market speculators in check that are looking for any signal to push USDCNH to 7
China Regulators Highlight Stability in Bid to Stem Market Rout
*CHINA WILL SUPPORT FINANCING TO NON-STATE-BACKED FIRMS: PBOC
Risk recovered every so slightly, but overall sentiment remains incredibly dour.
The market was expecting some policy suasion after the latest equity rout which triggered margin calls spooking creditors who have underwritten loans based on stock market collateral.
Investors and policymakers are looking on with fear because if those margin calls continue, investors will have to offload other assets to come up with the cash they need. But if you compound this on borrowed money, it could send the economy into the tank.
One option the Pboc had is to cut borrowing cost to stabilise the markets, but that policy shift might sound of more alarm bells t would trigger another wave of Yuan depreciation.
We know that mainland regulators war chest is enormous so at least for the time being this will reduce the risk of forced margin calls triggering the possible freezing of companies assets. However, the move to finance non-state enterprises may not be enough to stem the tide of ongoing China equity weakness driven by escalating US-China tensions, higher US interest rates and a weaker Yuan.
Ultimately its day late and a penny short, but it will at least offer some relief to the current headwinds. But it accomplishes little more than putting a band-aid on a broken leg at this point. In the face of escalation trade war.
Not the greatest of outlooks is it?
The Malaysian Ringgit
I what could best be described as hope for the best but prepare for the worst. Malaysia slashed its economic growth targets and deserted its plans to balance its budget by 2020, not exactly a ringing endorsement for the financial in Malaysia. And with capital gains taxes and other consumption taxes on the horizon, it’s not to difficult to figure out why Malaysia equity markets remain under pressure.
The leak on oil prices notwithstanding, regional risk sentiment remains ever so fragile as any sliver of optimism from US earnings gave way to that reality that trade tension and geopolitical unrest continues to gurgle.
Between the more hawkish FOMC minutes and the markets finding little comfort in US Treasury FX report, it’s a nasty combination for Asia investors. But things could get worse as the Yuan depreciation train could be arriving at the station anytime soon suggesting regional currency will undoubtedly remain a hostage to the Yuan’s underlying movement which could be a very a disruptive force for local sentiment.
But the fear of capital control slinking its way into BNM policy intensifies the risk of more foreign capital outflows. This possible policy shift is a very significant development and should be closely monitored.
Expect the Ringgit to trade with a negative bias against lower oil prices.
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