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Yuan Likely Continues to Consolidate amid NPC; China Still Looks to Avoid a Trade War



Yuan Likely Continues to Consolidate amid NPC; China Still Looks to Avoid a Trade War

Fundamental Forecast for CNH: Neutral

  • China’s NPC released detailed agenda for the top monetary and fiscal policymakers.
  • China’s low share in U.S. steel imports helps to reduce impact from Trump’s new tariffs.
  • Sending high-level delegates and maintaining conversations hint China wants to avoid a “trade war”.

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The offshore Yuan against the U.S. Dollar continued to consolidate this week, marking the sixth week in a row after it hit the 2.5-year high level in early February. In the coming week, two themes will continue to dominate the Chinese news wire: the elevated tensions in trade with the U.S. after Trump administration launched the sweeping tariffs on steel and aluminium. And the on-going National People’s Congress (NPC) meetings – a full agenda has been released with events from president election to PBOC governor appointment.

Trump’s newly-introduced 25% steel tariff and 10% aluminium tariff will inevitably bring negative impact to China, but there are two important questions to ask: How much will China get hurt? And is there going to be a trade war?

Regarding the first question, China is the largest steel exporter and produced 49.2% of the world’s steel in 2017, according to World Steel Association. However, the U.S. was not one of China’s top exporting countries for steel; the top ten countries were all Asian countries including South Korea, Vietnam and Philippines. For the U.S., China was neither its largest steel source. Canada, European Union (EU), Brazil and South Korea sold most steel to the U.S. and China only accounted for about 2%. As Canada is exempted from the new tariffs, EU will be the one to get the largest hit.

For China, overcapacity is not a new topic. Since 2015, the country has already set supply-side reformsas a top target, including cuts in raw material productions. At the same time, the nation is also developing new strategies to export excessive products to where they are in need. For instance, One-Belt, One-Road Initiative is designated to strengthen China’s connection with its neighbouring countries through infrastructure investments in those countries. This will help China to export steel, cement and aluminium. As China is already working on alternative solutions for overcapacity and China’s share in U.S steel imports is small, the impact of Trump’s new tariffs is expected to be limited to China.

While Trump’s administration takes on the “American First” policy, imposing tariffs could only be a start. Then, is there going to be a trade war between the U.S. and China? Remember a war needs two parties. In February, China sent two delegates to Washington D.C., in the effort to ease trade tensions: Yang Jiechi, a top diplomat and former Foreign Minister, and Liu He, a top economic advisor and the front-runner of PBOC governor. After Trump signed the tariff proclamations, China’s Commerce Ministry criticized it publicly. Yet, Trump also had a call with Chinese President Xi Jinping on North Korea issues the next day. For China, it will address its stands; at the same time, a more rational choice will be continue to ease conflicts rather than creating more, as the country is already busy dealing with a large amount of domestic issues.

In terms of theNPC meetings, China has released moderate economic targets for 2018. The top sessions to watch over the following days are the decisions on new Chinese government leaders. It is not uncommon to see drops in Yuan’s volatility around key events such as NPC meetings. However, once the top policymakers are determined, their measures could largely impact the Yuan rate and thus getting to know them is crucial.

Upcoming Top Sessions on NPC’s Agenda

March 11th, Sunday

3pmVote for the amendment of the Constitution

Why it is important: two-year term limitation for president is to be removed.

March 17th, Saturday

9amElection of President and Vice President

Why it is important: top executive leaders will be decided.

Election of the Chairman of the Standing Committee of the NPC

Why it is important: top legislative leaders will be decided.

3pmNomination for the Premier

March 18th, Sunday

9amAppointment of the Premier

Why it is important: top executive leaders will be decided.

Election of the President of the Supreme People’s Court and the President of the Supreme People’s Procuratorate

Why it is important: top judicial leaders will be decided.

March 19th, Monday

9amAppointment of ministers, minister-level heads, including PBOC Governor

Why it is important: China’s Central Bank determines the country’s monetary policy. Ministry of Finance and State Administration of Taxation decide the fiscal policy.

March 20th, Tuesday

9amVote for the government work report

New President’s speech

Why it is important: The new president will deliver his first speech. Despite that major economic targets have already been released in the government work report. The president’s speech could cover international relations and trade topics.


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If You Build It, Will They Buy? A Demand Led World




Fundamental Factors Focus:

  • US optimism peaking, which may mean the risky asset rally has further to run
  • Aggressive supply of base metals, energy is increasingly dependent on global demand picture
  • Signs of a ‘dollar shortage’ that aligns with risk off markets remain absent

Capital flows, business activity, a premium of borrowing costs, and consumer confidence are foundational components of an economy that sees investors rushing into risky assets, and shying away from investments that don’t capture the upside.

Optimism Reigns Stateside

Two data points have recently moved to extremes not seen since the kick-off of the Regan economic boom in the early 1980s that saw interest rates and inflation drop alongside tax cuts enacted that boosted confidence and productivity.

3 Measures Of Economic Activities Hitting Multi-Cycle Highs, Recession Unlikely

Please add a description for the image.

Data source: Bloomberg, Chart created by Tyler Yell, CMT

The first data point, the Institute for Supply Management (ISM) Manufacturing Business Survey just aligned with the NFIB small business optimism index to hit levels not seen in years. For the Small Business Optimism Index, it recently reached the highest level since 1983 where the ISM hit a 13-year high last month.

Friday morning also saw a 14-year high of the University of Michigan Consumer Confidence reading with an all-time high with the current conditions gauge that measures American’s perception of their personal finances hitting an all-time high.

What is worth noting in both cases is that both in the early 80s, and ISM in May 2004 was seen at the early- to mid-point of an economic expansion. Should a similar development be in place, traders should keep their low-probability high-impact scenarios saved for their NCAA March Madness Brackets, and the high-probability mid-impact events applied to investing.

In other words, and as I argue in Ichimoku Charts that Matter, shocks tend to happen in the direction of the trend. Rallies typically don’t end with a bang opposing extreme optimism like we see now, but rather, rallies tend to rollover, and the sharp downside moves that make headlines that turn into a bear market often come off a bad news crescendo when investors tend to sell first, and ask questions later.

Currently, we seem to be far away from a rollover as optimism reigns supreme. Also, aside from the 2001/2 recession, peaks in confidence tend to happen early- to mid-cycle favoring an extension of the current risky-asset buying environment.

Unfamiliar with Key FX Fundamental Factors to watch? No worries, I created a primer for you here

You Can’t Have Demand without Optimism, and Demand Is up per Oil Data

Two stories in the commodity world that have come to surface in recent months is the aggressive supply of crude oil from US shale producers that is running counter to the plans of OPEC and strategic alliance like Russia to reduce the supply glut.

Another focus has been on supply from China regarding steel and aluminum. The supply remained uncomfortably high for many despite the winter production curbs and enforced reduction and in some cases, halting of supply from ‘rogue’ metal suppliers. The trade tariff’s from US President Trump appear squared on China and Europe, and could cause the supply from China to not be adequately absorbed, and may put pressure on prices if optimism and demand do not stay supported.

However, in Crude’s case, at least when looking at IEA projections, demand is making the aggressive supply coming online be quickly absorbed. The monthly IEA report predicted a widening supply deficit forming later this year due to the decline in Venezuela’s Oil Production due to their own economic turmoil. The IEA forecast could mean that the global oil inventory surplus would disappear in H2 2018.

While demand is exciting in the short-term, supply is often stickier. Suppliers tend to look at their supply as prophetic, and a fall of demand is often seen, and hoped to be temporary. That is the pickle that global oil producers found themselves in during the 2013-2014 supply build up as demand fell-off and eventually sent Brent Oil to $30/bbl, before a sharp bounce took in early 2016.

Crude Oil And Crude Produce Stockpiles Continue To Fall On Higher Demand

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Data source: Department of Energy, Bloomberg

Next Arrow in the Bull’s Quiver, No Dollar Shortage in Sight

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Data Source: Bloomberg

Out of the gates of the Great Financial Crisis was a sharp inverse correlation between the US Dollar and riskier asset price levels. A large factor in this development was the view that there was a US Dollar shortage and demand for haven assets as investors remained unsure of the sustainability of the feeble recovery.

One of the metrics looked at in the financial market is sometimes referred to as the market’s plumbing or liquidity around the reserve currency, the US Dollar. The market that is utilized to see ‘funding stress’ or a ‘dollar shortage’ is the cross currency basis swap or when a currency from one investor is exchanged for another currency based on swap rates calculated from each country’s yield curve.

The chart above shows the rising LIBOR-OIS spread, which indicates a higher interbank borrowing cost over the implied Fed reference rate. While the spread is widening, stress that typically aligns with Dollar strength and a ‘dollar shortage,’ appears no where insight. The orange line shows the 3M EURUSD 3M cross currency basis swap with sharp downspikes showing funding stress. The lack of funding stress with the stable orange line means that traders looking for an aggressive dollar rally based on the shortage of USD argument could be waiting a while for their anticipated outcome to play out.

As a swap contract, there is no value on initiation, and the market value is based on demand for once currency or another. When looking at the EUR/USD or USD/JPY cross currency basis swap, you can see if a ‘dollar shortage’ is developing or whether they were plenty of dollar in the system such that the swap shows less of a demand for US Dollars.

Given the typical inverse correlation to the US Dollar and risky assets, a weaker dollar or lack of dollar supply like the chart above shows could mean that the risky asset rally has room to run as the other points make sense.

New to FX trading? No worries, we created this guide just for you.

—Written by Tyler Yell, CMT

Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.

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US Dollar on Offensive Before Fed Rate Decision. Will it Last?




US Dollar on Offensive Before Fed Rate Decision. Will it Last?

Fundamental Forecast for the US Dollar: BULLISH

  • US Dollar fell on in-line CPI data, then rallied into Fed meeting
  • Pre-emptive gains hint markets worried tightening will accelerate
  • Policy bets tellingly dwarfing news-flow from Washington DC

Join our webinar for live coverage of the FOMC rate decision and its impact on the US Dollar!

A week marked by seesaw price action ended with a spirited push higher for the US Dollar. The rally was especially notable in that it occurred without an obvious fundamental catalyst. The week’s top data point of interest was February’s CPI print. The headline inflation rate printed exactly in line with forecasts at 2.2 percent, which eased worries about Fed rate hike acceleration and sent the greenback lower. A weekly bottom started taking shape a mere five hours later however, from which it rallied into Friday’s close.

The recovery tracked a parallel rise in front-end US Treasury bond yields. That this occurred after the influence of the CPI release subsided appears telling. The next bit of noteworthy event risk would not come until the FOMC monetary policy announcement on March 21. After newly minted Fed Chair Jerome Powell led a hawkish pivot in officials’ rhetoric in recent weeks, it seems entirely reasonable to suspect that it may mark a pickup in the expected pace of stimulus withdrawal. The Dollar’s rise then look like pre-positioning.

The priced-in rate hike trajectory implied in Fed Funds futures for 2018 has stabilized around 75 basis points, matching the Fed’s own forecast. Investors’ view for 2019 remains modest however. One rate hike is expected and the odds of a second are seen as worse than even. Nothing is on the books for 2020. That leaves plenty of scope for the Federal Reserve to signal a more assertive disposition. The first post-announcement press conference with Chair Powell presents a further opportunity to reinforce the pivot.

The US currency’s preemptive rally telegraphs the markets’ concern with such an outcome. Momentum will probably slow ahead of the announcement, with traders unwilling to commit until after it hits the wires. When that happens, fireworks are likely. The Fed’s primacy in shaping trends coupled with a tame docket in the days thereafter also means follow-through faces few obstacles. Indeed, short work was made of Rex Tillerson’s actual ouster from the Trump administration and H.R. McMaster’s rumored one last week.


— Written by Ilya Spivak, Sr. Currency Strategist for

To contact Ilya, use the comments section below or @IlyaSpivakon Twitter

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GBP: From Famine to Feast




GBP: From Famine to Feast - BOE, Hard Data and Brexit

Talking Points:

  • UK data releases include, Inflation, jobs and wages
  • Bank of England MPC announcement
  • EU Council meeting on the EU/UK transition period.

Fundamental Forecast for GBP: Neutral

While we remain neutral on Sterling at this current point, GBP may be in for a rocky ride next week with market moving data points including inflation, jobs and wages as well as the latest monetary policy announcement from the Bank of England. And just to round the week off, the EU Council will meet on Thursday/Friday to discuss the latest EU/UK transition period documents with UK businesses waiting for the outcome.

The latest inflation and wages data may well see the gap between the two narrow further – inflation expected to slip lower/wages expected to tick higher – giving the UK consumer more money in their pocket. The recent negative real wage gap has weighed on the UK retailers in particular and any narrowing of the gap may bring welcome relief to the high street.

The Bank of England is expected to leave all monetary policy levers untouched on Thursday but any change in voting pattern on rate hikes, or hawkish commentary in the accompanying statement may cement a rate hike at the May meeting, boosting the British Pound.

The UK and the EU are targeting next week’s EU Council meeting to finalise a Brexit transition period, giving government and businesses the clarity the require to build for the future. While negotiations have taken a slight turn for the better of late, with both sides adopting a more conciliatory tone, there possibility of a last-minute hitch is still very real, an event that would hit both GBP and EUR lower.

GBPUSD Price Chart Three Hour Timeframe (February 27 – March 16, 2018)

GBP: From Famine to Feast - BOE, Hard Data and Brexit

— Written by Nick Cawley, Analyst.

You can contact the author via email at or via Twitter @nickcawley1.

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