USD/CNH has continued to move to the upside as expected but the move is not over and we expect far more upside for the reasons outlined in the article below...
China is now a big news story and the slow up will continue the USD will continue to rise on the Yuan and while many in the market are looking for big stimulus from the PBOC to boost consumption this is not an option as debts are so high in China and big stimulus could lead to a crash.
China Economy a Slow Up Which Will Get Worse
China is seeing its economy slow up dramatically not only are exports falling there is no internal demand to offset the fall in exports China is in deflation and we would expect this to lead to recession. The charts below show how dire the situation is in China.
Leading Indicators have collapsed below 50 and point to a recession.
The dramatic fall in exports can be seen in the drop in dry freight trade on major shipping routes out of China.
Unemployment is rising as job vacancies fall
Slow Up In Bank Lending
"China’s bank loan growth fell to its lowest in seven months in July, while broad credit growth dropped to a record low. We expect further policy rate cuts (as soon as next Tuesday) and a spike in government bond issuance in the coming months, but unless there is a wider improvement in business and household sentiment, this probably won’t lift credit growth much." (CAPITAL ECONOMICS)
The slow up in the Chinese economy can also be seen in bank loans - Chinese banks granted just 345.9 billion yuan ($47.80 billion) of new yuan loans in July, down a whopping 89% from June and the lowest level since the 4th quarter of 2009.
The bad news keeps coming from China: “Missed payments on investment products by a leading Chinese trust firm and a fall in home prices have added to worries that China's deepening property sector crisis is rapidly stifling what little momentum the economy has left. Zhongrong International Trust Co., which traditionally had sizable real estate exposure, missed payments on dozens of investment products since late last month, a senior official has told investors. (REUTERS)
We saw average new home prices in China's 70 major cities fell 0.1 percent year-on-year in July 2023 after moving up 0.1 percent in the previous month, pointing to the fifth fall so far this year and more defaults can be expected as the biggest bubble in the world ends. China is heading for deflation and recession which is bad news for China, commodities and commodity currencies as well as risk sentiment.
Defaults are on the rise in Rise as the Property market bubble bursts.
The Chinese economy is in deep trouble and to add to China's woes we are seeing capital flight.
Interest Rate Differentials
The interest rate is in favour of the USD and the differential is widening...
China No Big Stimulus Coming
What Can China do to halt the decline in the economy? “Time is of the essence if Chinese authorities want to meet growth targets. We think more stimulus is coming. China trade in equities is still on, just not in China directly. China-exposed stocks in DM have continued to rally YTD, but have fallen off recently. We think going forward the “China in DM” trade is changing. Bearish positioning and cheap valuations make the Metals and Mining, especially in Europe, a potential biggest beneficiary of the upcoming China stimulus" (CITI)
CITI expect big stimulus but this is not an option and the Chinese know it because debt levels are to high at all levels of society
Is There Anything the Chinese Can Do?
They can allow the USD to rise on the Yuan which will help to make their exports more competitive - while this won't solve the problems of the Chinese economy it will help. Our view of the key levels of support and resistance to look out for below in terms of USD/CNH.