CURRENCIES | Risk Aversion
CNH-CNY Spread
Jan 1 Jan 4 Jan 5 Jan 6 Jan 7 Jan 8 Jan 11 Jan 12 Jan 13
The EUR/USD pair could resume its downtrend if the risk sentiment improves. The UK Pound has been one of the worst performers among the major currencies
borrowed the weak CNH and sold it short knowing that they could cover it at an even weaker level subsequently. In a desperate attempt to halt the carnage and narrow the spread between CNY and CNH the PBoC fixed the USD/CNY pair higher for 8 straight sessions and simultaneously intervened in the offshore market by selling USD/CNH. This move deterred speculators as it dried up CNH liquidity and halted the USD/CNH rally. By selling USD/CNH, the PBoC dried up CNH liquidity to the extent that overnight CNH HIBOR (Hong Kong Interbank Offered rate) shot to as high as a whopping 66%. The PBoC also imposed a few capital controls to prevent US Dollar outflow. Though the PBoC succeeded in restoring some sort of sanity to the markets, it ended up burning $108 billion of its Forex reserves. Chinese December trade data came in better than expected and further helped stabilize the Chinese Yuan. Before the dust had even settled
around the whole Chinese saga, a fresh bout of risk aversion gripped the global markets as crude prices slipped below $30 per barrel mark for the first time in 13 years. Supply glut coupled with concerns over global growth pushed crude prices
February 2016 |
www.wealth-monitor.com
down to $27 Dollars per barrel. With Iranian crude likely to hit the markets on account of lift off of sanctions by the EU, US and UN, supply glut is likely to get further aggravated. In classic risk-off moves, emerging market stocks, bonds and currencies got hammered, funding currencies (i.e. carry trade currencies such as Euro and Japanese Yen with artificially low interest rates), gold and US treasuries strengthened. The Euro has consolidated in 1.07-1.10 range against the US Dollar during the month. Carry trade unwinding pressures have supported the common currency.
Pound Takes a Pounding The EUR/USD pair could resume its downtrend if the risk sentiment improves. The UK Pound has been one of the worst performers among the major currencies. The MPC voted 8-0-1 in favor of keeping rates unchanged. The BoE (Bank of England) governor in his speech said that the current situation is not ideal for hiking interest rates. Brexit (term coined for Britain exiting the European Union) concerns continue to weigh on the Cable as well. The outperformance of the Japanese Yen can purely be attributed to
its safe haven allure. For the first time since October 2012 net long positions have been reported in the Japanese Yen (i.e. short positions in USD/JPY) in CFTC’S COT (Commodity Futures Trading Commission’s Commitment of Traders) US December non-farm payrolls beat all estimates and came in at 292k. Even the November payrolls got revised upward to 252k from 211k. However, the major disappointment was that there was no improvement on the labor force participation and average hourly earnings front. With prevailing global risk aversion and data not compelling enough, the US Federal Reserve is expected to keep its monetary policy unchanged in the January FOMC meeting and perhaps even in March. These expectations are consistent with the movement in US IRS (Interest rate swap) curve. Going forward, developments in China and movement in crude prices would be major drivers of risk sentiment. If crude prices continue to sustain at current low levels, it would have a serious negative impact on countries like Nigeria and Venezuela. It would also become increasingly costly for some of the Middle Eastern countries to maintain their pegs against the US Dollar. As far as China is concerned, the road to recovery is likely to be a long drawn one. Structural reforms and pick up in domestic consumption would hold the key. At this point in time we can only hope that the year ahead shapes up better from here on.
Jan 14 Jan 15 Jan 18 Jan 19 Jan 20 Jan 21 Jan 22 Jan 25 Jan 26 Jan 27
33
0.0769 0.0945 0.1292
0.1373 0.0874 0.0888
0.0158 0.007
-0.0095
0.0104 0.0305 0.0029
0.0117 0.0231
0.0221 0.0314
0.028 0.0272 0.0327
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