Investors hope for more stimulus following weak China growth (A50, CNH)

Fundamentals point to further weakness for the Chinese economy, and that has been another headwind for the China A50 index. It also builds a case for a weaker yuan.

China

China’s economy beat expectations and grew by 4.8% y/y in Q1 according to data by NBS (National Bureau of Statistics). Yet the news is bitter-sweet as leading indicators and lockdowns point to weaker growth in Q2. For example, both the services and manufacturing sectors are contracting according to NBS and Caixin PMI reports, and large-scale lockdowns means that earlier rounds of fiscal support (such as tax cuts and tax rebates) have not done enough to support the economy.

Read our guide on the PBOC (People's Bank of China) and inflation

 

20220420a50DashboardFX

Earlier this week the PBOC (People’s Bank of China) unveiled measures aimed at helping people and companies affected by Covid, although initial feedback suggests the measures are quite small relative to the size of the problem. That said, today it was reported that the PBOC held a meeting with CBIRC (China Banking and Regulatory Commission) to discuss financial assistance for the real economy although details are yet to be announced. But with Beijing continuing to crackdown on industry sectors as part of the ‘common prosperity’ initiative, it has done little to help equities. We can see in the above table that 8 of the top 10 stocks in the China A50 remains near their 1-year lows.

 

China A50 set to break lower?

20220420a50FX

The underperformance of mega-cap stocks means we retain our bearish bias for the China A50 index. The index has been in a strong downtrend since the February 2021 high and its recent retracement has met resistance at two key Fibonacci ratios. The 50-day eMA has capped as resistance and a triple top has formed around the Fibonacci zone. Momentum has recently turned lower, so it is possible the corrective high was at 14,118. Form here we want to see a break (or daily close) below 13,480 to assume a resumption of its downtrend.

 

Is China ready to let their currency slide?

20220420udcnhfFX

From a currency perspective it makes more sense for China to let their currency weaken. We made a case for a strong rally on USD/CNH and today we have seen prices break above 6.42 resistance, so this could be the early part of the multi-month rally we discussed in mid-March.

Notice how the market didn’t quite reach the 6.3000 level, which is when the yuan was devalued in 2015. We have since seen an initial burst higher followed by a period of consolidation, before prices broke out of a triangle pattern yesterday.

 

 

 

How to trade with FOREX.com

Follow easy steps to start trading with FOREX.com today:

  1. Open a Forex.com account, or log in if you’re already a customer.
  2. Search for the pair you want to trade in our award-winning platform.
  3. Choose your position and size, and your stop and limit levels.
  4. Place the trade.

Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

Open an Account