Macro Strategy: PBOC’s liquidity strategy; USD’s fundamental support


PBOC addresses tightness; USD gains traction.
Nathan Chow, Philip Wee23 Sep 2020
    Photo credit: Unsplash Photo


    China rates: PBOC pumps cash to ease liquidity stress

     

    On Tuesday, the People’s Bank of China injected a total of RMB350bn into the banking system, the biggest net injection of short-term funds since February. The authorities added RMB200bn through 7-day reverse repurchase agreements and RMB150bn via 14-day reverse repo. Yesterday’s injection came after the authority added a net RMB400bn liquidity via the medium-term lending facility on 16 September.

     

    Funding has remained tight over the past week due to the government debt payments and rising cash demand at quarter-end. The weighted interest rate for the 7-day interbank repurchase rose to the highest level on Tuesday since early February. Onshore banks’ excess reserve hovered near the lowest level in more than two years, suggesting lenders were grappling with dwindling cash buffers. Liquidity was also scarce in the foreign exchange market. CNH’s 12-month forward points climbed to the highest level since 2017 early this month and has stayed elevated since then.

     

    Yesterday’s operations have done little to alleviate the relative drought. The five-year sovereign yield, which is more sensitive to liquidity conditions than its longer-tenor peers, remained largely steady at 2.9%. Month to date, the amount of net cash injections has totaled RMB510bn. About RMB900bn of reverse repo contracts are set to mature before the National Day holiday beginning on 1 October. We expect the authority to step up efforts to mitigate the liquidity shortage through open-market operations in the near term. Looking into 4Q, a reserve ratio cut is still possible in the face of mounting government bond supply. Slowing inflation should give the PBOC more room.


    FX Daily: USD regains its relative strength

    The USD Index (DXY) extended its rise to the top of its 92-94 range set since late July. EUR, its largest component, fell decisively below its 50-day moving average (MA) to 1.17. The next key moving average is the 100D MA at 1.1460, just above June’s high of 1.1420. GBP depreciated a third session to around 1.2733. While GBP may be supported around its 200D MA at 1.2730, its upside will be capped by its 10D MA at 1.2850. The European Commission has reportedly adjusted its autumn economic forecasts to include the risk of a no-deal Brexit at the end of the transition period on 31 December. The implied yield on short sterling futures rose to 0.075% from 0.04% after the Bank of England played down prospects for negative rates in the short-term. Interest rate futures, however, have not abandoned the odds for negative rates in 2021.

    PMIs today should affirm the relative strength of the US recovery in 3Q over its European counterpart. Manufacturing and services PMIs in the US overtook the EU in August. Consensus expects manufacturing PMIs to firm to 53.5 in September from 53.1 a month earlier in the US, and at a slower pace to 51.9 from 51.7 in the EU. Conversely, consensus sees services PMI slowing to 54.5 from 55.0 in the US and improving marginally to 50.6 from 50.5 in the EU. Even so, the services sector in the US is still expanding at a faster clip than the EU. The Atlanta Fed GDPNow forecast is looking for US growth to rebound by an annualized 32.0% QoQ in 3Q from -31.7% in 2Q.

    Major US stock indices recovered on Tuesday after Monday’s sell-off but remained below their 50D MAs. The Dow, S&P 500 and Nasdaq rose by 0.5%, 1.1% and 1.7% respectively. All indices are capped by their 50D MAs with support located around their 100D MAs. The short-term ranges are likely to be 26420-27520 for the Dow, 3190-3340 for the S&P 500 and 10320-11010 for the Nasdaq. Apart from agreeing that the US economy needed more stimulus, Fed Chairman Jerome Powell, US Treasury Secretary Steven Mnuchin and US House Financial Services Panel did not offer any roadmap on how this could be achieved. Chairman Powell will be testifying on the coronavirus crisis before the House select committee today before he testifies again with Mr Mnuchin on the CARES Act to the Senate Banking Committee tomorrow.

    NZDUSD has fallen into its July-August trading between 0.6490 and 0.6720 with a downside bias. The Reserve Bank of New Zealand is expected to keep its guidance for negative rates in 1Q21 at today’s monetary policy meeting. AUDUSD broke its 50MA at 0.72 and is setting its sights lower at 0.70 or its 100D MA. The Reserve Bank of Australia is increasingly expected to complement the Budget announcement on 6 October with more monetary easing. RBA deputy governor Guy Debelle said that it would take at least three years before the Australian economy can achieve full employment that pushes up inflation. Effectively, this matched the Fed’s latest average inflation stance that keep US rates on hold through 2023. On a final note, AUD has also become vulnerable to downside risks in gold which has drifted to USD1900/oz.

     

    Nathan Chow

    Senior Economist/Strategist
    nathanchow@dbs.com


    Philip Wee

    FX Strategist - G3 & Asia
    philipwee@dbs.com

     
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