FxWirePro: Spotlight on intricacies of BRICS FX universe and trade radar – Episode 2

CNY:The US trade conflict has seen material developments on two fronts. The imposition of the $16bn tranche and retaliatory reaction was neither surprising nor market moving, but further reinforces that the US-China trade conflict shows little sign of straying from its steady and incremental march towards escalation. That said, the PBOC did introduce a reserve requirement on FX forwards, designed to effectively raise the cost of shorting yuan. Nonetheless, the sum of these developments was enough to lead our Asian FX strategists to downgrade CNY forecasts earlier this week.

China’s central bank last Friday officially confirmed that the FX market makers had added the “counter cyclical factor” into USD-CNY fixing mechanism, another move that China would like to seek currency stability for now. The so-called "anti-cyclical factor" is nothing more than a black box and prevents a calculation of the fixing based on the procedure specified by PBoC. Ultimately, it should only conceal the fact that the PBoC sets the course according to its wishes. 

The “counter-cyclical factor” was introduced for the first time in May 2017 when the yuan was under great pressure to depreciate, but was removed from the fixing mechanism this January when the depreciation pressure on yuan was almost gone. The re-launch of “counter-cyclical factor” is not surprising as CNY has been performing badly amid the rising trade tensions. Indeed, recent USD-CNY fixing rates have tended to surprise on the downside (i.e. stronger CNY). 

USDCNY, however, experienced a wild movement last Friday. USDCNY climbed towards 6.90 on Friday morning due to disappointment in US-China trade talk results, but bounced back to 6.80 level after the PBoC’s confirmation on “counter cyclical factor”. 

Over the past few weeks, the PBoC has intensively defended its currency especially when USDCNY was above 6.90, suggesting that the central bank still sees 7.00 as a key hurdle. Nonetheless, we also see limited upside to CNY as the growth is still under pressure and the current account surplus continues to narrow. All told, the PBoC is walking on a tightrope.

ZAR: The US President’s tweet on the subject of the land reform put pressure on the rand short term. The South African government immediately criticised that the comments were based on incorrect information. During the course of the day hawkish Fed comments put pressure on the rand and other EM currencies. 

In view of next year’s parliamentary and presidential elections the going will remain tough for the South African government and central bank. At least central bank governor Lesetja Kganyago signalled yesterday that he would be available for another period in office as head of the central bank. 

He was voted central bank governor of the year in early 2018 as he had defended the independence of the South African central bank (SARB) in 2017 during the era of President Jacob Zuma. And he is still guarding its valuable and high reputation today. The SARB is a major support for the rand, above all in volatile times. 

Trade tips: 06-Dec-18 USDZAR call options (14.50) were advocated in our previous post at spot reference: 12.10 levels, we currently maintain the same strategy at 14.3160levels. Courtesy: Commerzbank

Currency Strength Index: FxWirePro's hourly USD spot index is flashing at -17 levels (which is neutral), while articulating at (10:37 GMT). For more details on the index, please refer below weblink:

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