China - Will reform lead to another "hard landing"?
We have no doubt that China entered another round of slowing down due to subdued domestic and external demand, as well as shadow banking fears. After it released the full set of economic releases in May, it confirmed slow momentum for growth in Q2 and toward the end of the year. Key data, such as Inflation, Trades and Aggregate Financing, suggested weak global and domestic demand at best.
A new theme is on the table now - the liquidity issue. The SHIBO and 7-day repo rate became key indicators in China's capital market pricing. The People's Bank of China (PBOC) denied injecting liquidity until last Friday, trying to pass the message of its determination to collaborate with local officials to put reform as its priority. Rumors came out last week that one of the largest banks in China was close to default if the PBOC didn't react last Friday. The Industrial and Commercial Bank of China (ICBC) also stopped its ATM operation service last Saturday due to "technical reasons."
To view Figure 2, please visit the following link: http://media3.marketwire.com/docs/fxp0624fig2.pdf.
According to the latest M2 and New Yuan Loan, liquidity shouldn't be a problem in the Chinese banking system. The only explanation could be cash parked in the wrong place. As we knew, many large corporations continued putting large capital in wealth management products (WMP) issued by trusts.
Nevertheless, I expect monetary policy in China to remain tight before it releases the 2Q Gross Domestic Product (GDP) next month. Some accommodative policies might be seen if data goes to the extreme. In the PBOC's latest statements, Governor Zhou Xiaochuan highlighted that the monetary policy could be adjusted in either direction according to the economic condition. Interbank lending rates remain key indicators gauging the "bull and bear" sentiment in the capital market.
Continue with underweight commodity currencies in near term
Underweight commodity currencies are our main theme since speculation on the Fed's tapering increased, and an increasing number of investors believe it's real.
Together with the recent Chinese credit crunch on the table without much assistance from the PBOC, commodity currencies such as the Aussie and Kiwi might be "under the water" for a prolonged period.
On the technical side, the NZDUSD fell into a clear downtrend channel since the beginning of the May. With ongoing negative catalysts for commodity currencies, the NZDUSD may face some headwinds near 0.7890, and supported at 0.75 in the near term.
To view Figure 3, please visit the following link: http://media3.marketwire.com/docs/fxp0624fig3.pdf.
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