SINGAPORE, SINGAPORE--(Marketwired - Oct. 29, 2013) - In FXPRIMUS' Market Brief of The Week for 28 October, the brokerage firm's Senior Economist, Jimmy Zhu, looks at the rising RMB and the Aussie.
Do rising Chinese money market rates signal a better or worse economy?
Last week, hiked Chinese inter-banking lending rates jittered Asian currencies, such as the Aussie and Kiwi, which heavily sold-off against the Greenback. On the other hand, most European currencies outperformed the Greenback when more evidence proved that the currency bloc emerged from its historically longest recession.
Asian stocks rose and the benchmark MSCI Asia Pacific Index extended its gain in the morning session. The message is clear: central bank stimulus and liquidities will remain, especially for the Federal Reserve (Fed) and Bank of Japan (BoJ). The Fed will refrain from reducing the Quantitative Easing (QE) pace this week, as expected. And the BoJ may consider adding further stimulus to raise its inflation level.
However, there are some arguments in the market regarding rising Chinese inter-bank rates. There is a controversial view here: money market traders bet that the biggest jump in money-market rates since June's record cash crunch is a sign of strength in the nation's economy, rather than finance-industry weakness. The central bank refrained from injecting funds into the banking system since 17 October, driving the benchmark seven-day repurchase rate 138 basis points higher to 4.88% last week, the biggest increase in four months. It climbed five basis points further today.
The Yuan rose 2.4% this year and touched a 20-year high of 6.0802 per dollar, according to the closing fixing last week.
Here's some background information on the rising RMB:
- Currency appreciation signals that its economy strengthens, such as the USD in middle of the year and the recent Euro.
- Improving demand on the currency could be due to its currency-linked assets, such as stocks and bonds.
- Liquidity isn't so ample, or the central bank is taking back liquidity.
- Inflation is high. China just announced its Consumer Price Index (CPI) at 3.1% YoY.
Thus, the Aussie and Kiwi traded higher this morning on the wake of a sound Chinese economic condition. I expect that this momentum will continue, especially since the Fed will likely release a dovish statement this week.
Top news this week
New Zealand: Reserve Bank of New Zealand (RBNZ) Cash Rate.
I expect figures to come in at 2.5%.
China: Manufacturing Purchasing Managers' Index (PMI)
I expect figures to come in at 51.
Long AUDUSD at 0.9570
On the H1 chart, the AUDUSD moves in a consolidated mode after its latest rebound from early October, with prices nearly touching 0.98. With China's possibly strong PMI data and a dovish Fed, I would like to go Long on the Aussie this week.
Based on the AUDUSD H1 chart, a strong support formed at the 0.9570 level in the near term. We will go Long once prices dip to this level, with a Stop Loss of 60 pips. We will have two targets on this trade: exit the first position at 0.9630 and the second at 0.9690.
|Entry Price = 0.9570
|Stop Loss = 0.9510
|1st Profit = 0.9630
|2nd Profit = 0.9690
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