It’s said that the night is blackest just before the dawn, and investors clearly had a very dim short-term outlook on China’s economy earlier this week. After some aggressive action from the People’s Bank of China (PBOC) and better-than-expected trade data, there is a glimmer of hope on the horizon, but only time will tell if it’s a false dawn or a real sign that things are getting better in the world’s second-largest economy.
As we noted last week, the PBOC has been guiding the value of the "on-shore" version of its currency (CNY) lower, presumably in an effort to head off a potential economic slowdown. Not surprisingly, traders have caught wind of this persistent trend and started selling the "off-shore" version of the currency (CNH) to head off the PBOC. This logical action created a bit of a self-fulfilling prophecy because the previous day’s value of the CNH is a factor that the PBOC considers in setting the daily reference rate for the CNY.
In some ways, it’s like the Chinese version of Lehman Brothers in 2008: the value of the stock kept falling because of rumors that other banks were cutting off funding for Lehman, and the falling value of the stock made more banks stop doing business with Lehman, driving the value of the stock lower in a vicious cycle.
Chinese authorities, ever vigilant to head off any potentially destabilizing economic developments, aggressively intervened into the market to buy CNH yesterday, driving overnight HIBOR (or the cost to borrow funds in Hong Kong for one night) all the way up to 66.8%. This made it prohibitively expensive for traders to borrow money in order to short the CNH, therefore closing the gap between the on-shore and off-shore exchange rates.
If your eyes just glossed over and your mind started wandering over the last couple paragraphs, here’s what you need to know: China’s central bank took aggressive actions to prevent traders from pushing the value of its currency lower in an effort to calm international markets.
Today, Chinese policymakers received some much needed help from some good old-fashioned economic data. China’s December trade surplus came out at 382B yuan, better than the 339B figure expected. More to the point, both imports (-1.4%) and exports (-7.6%) declined by less than expected. At least to the extent that these numbers can be relied upon, today’s trade data signals that the Chinese economy is doing better than the worst of the pessimists had feared.
Technical View: AUD/USD
Of course, more optimism about China has a direct positive effect on some of China’s close trading partners, including Australia. AUD/USD has bounced back modestly over the past couple of days to regain the .7000 handle, but last week’s big drop did too much damage for bulls to feel at all comfortable as of right now.
Indeed, the secondary indicators suggest the Aussie’s recent stabilization is more likely an oversold pause, rather than a significant bottom, at least at this point. The MACD is still trending lower below both its signal line and the "0" level, showing strong bearish momentum, and the RSI indicator has merely reverted back to more neutral levels after peeking into oversold territory at the start of the week.
For AUD/USD bulls to have any confidence that this week’s rally is sustainable, they’ll need to see rates break back above the previous bullish trend line around .7150. Meanwhile, a break below Monday’s low could quickly expose the six-year low at .6900, and if that level gives way, a move back into the mid-.6000s could be next.