Beginning in 2012 and continuing today, the Chinese economy has been gradually losing momentum.
The year-on-year GDP eased back from 8.9 per cent in the final quarter of 2011 to 7.3 per cent in the fourth quarter of last year. This is despite all of the stimulus packages, main rate cuts, lending rate cuts and the reserve requirement ratio rate cut in the past months.
During this period we saw the yuan advance against the US dollar from 6.78 in 2010 to 6.01 last year, an increase of about 11.3 per cent.
The People’s Bank of China (PBoC) then intervened, increasing the daily trading band and sending a clear message to the market that the yuan is not a one-way bet. This was at the beginning of 2014, which led the yuan to decline again against the dollar to 6.26. However, bullish investors, who still see China as a global economic success story, pushed the currency back to 6.10.
The strength of the yuan had a dramatic impact on the Chinese export market, which collapsed at the beginning of last year, forcing the PBoC to make its first intervention in an attempt to weaken the currency. In January Chinese exports fell again by 3.3 per cent, causing the PBoC to intervene once more, pushing the unit back to 6.29.
The results of these actions were clear, with Chinese exports rising by 48.3 per cent, the largest increase in a single month since April 2010, while imports fell for the fourth month in a row, not seen since the start of the financial crisis in 2008.
In short, China entered the currency war, and sent a clear message to the markets that, whatever happens, it will not allow exports to decline.
Last month the PBoC intervened more than three times. Some would argue that this is a sign of weakness and others would say that China has acted too quickly, but the reality is that there are no rules for central banks to follow. They are all intervening without any coordination, without any liaison or discussion. However, the interventions can send a clear indication of strategy, and therefore we now know that the PBoC is focused on keeping GDP above 7 per cent.
The yuan is likely to weaken again over the next few months, whether by traders or by the central bank.
The currency is now widely traded by regional investors and there are a number of key levels to watch for in the next few weeks. These stand at 6.36 followed by 6.40, which represents a 50 per cent decline from the high of 2010 to the low of 2014.
At this price, sellers are likely to appear again. However, a break above that resistance may lead to another rally towards 6.49, which would be the key for a further rally.
On the downside view, 6.26 is regarded as a new solid support area. Therefore, any downside pressure in dollar-yuan is likely to be limited above that support and buyers are likely to appear, with stops for trades below 6.10.
Nour Eldeen Al Hammoury is the chief market strategist at ADS Securities
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