USDCNH rose after the People’s Bank of China's surprise interest rate cut last Friday. The pair is now testing the November 7 high at 6.1421 and the downward trend line from the May 28 high. If broken, it may open the door to 6.1800 to 6.1850.
On the down side, 6.1100 and 6.1092 (the 61.8% Fibonacci retracement from February's low to the year-to-date high of 6.2710) will provide strong support. On the weekly chart, indicators have shown a divergence signal.
The surprise rate cut pushed China’s Shanghai Composite Index 2% higher in the morning session led by non-bank financial and real estate stocks. Many market participants expect more interest cuts and/or deposit reserve ratio cuts will come in future as a single rate cut is not enough to stop a further economic growth slowdown.
Meanwhile, banks will still be reluctant to lend money to small and micro businesses as well as to some property developers in consideration of default risks. Some argue that even property developers can get more money with lower costs; they are not necessarily going to increase investment because of the high inventory, which means steel and cement and other upstream industries associated with real estate will get very limited support.
Local government will be more cautious when they borrow money because the central government will no longer provide bailouts. Market participant are therefore expecting more stimulus will come and the Chinese yuan will be under pressure. Besides, the continuous depreciation of the JPY and KRW may have also caused Beijing’s discontent.
Disclosure: To subscribe to the Daily Shot letter by e-mail please enter your e-mail address here: Subscribe to the Daily Shot