CNY squeezed pre-inflation data, EUR consolidates

Forex News and Events

The stronger risk management on bond issues in China squeezed the Yuan and equities today. CSDC (China Securities Depository and Clearing Corporation) announced yesterday its decision to no longer repurchase new corporate debt with rating under AAA, nor company debt under AA rating. This decision significantly narrows the pool of securities used as collateral, therefore could tighten the liquidity conditions as many financial institutions will have no choice other than decreasing their leverage ratios. The new rule will hit 1,074 bonds to be issued and a total of 470 billion yuan bonds according to estimates. News hit hard the Chinese equity indices: Hang Seng closed 2.34% down, Shanghai’s Composite got hammered (-5.43%).

USD/CNY rallied aggressively to 6.2079 for the first time since July, leaving far behind our former target zone of 200-dma (6.1792) and Fibonacci 61.8% (6.1803). The RSI advanced to 81%, while the 30-day upper Bollinger band has been left behind a distant (6.1693) on sudden spike in vols. Should the inflation figures due on Wednesday reinforce the CNY sell-off, reviving speculator bets for more PBoC easing, there may be an intervention to cool-off volatilities. We expect a step back in the weekly Ichimoku cloud base (6.1533/6.1940) in the short-run. Moving forward, the PBoC will most certainly proceed with a system-wide RRR and further rate cuts to sustain liquidity. We see limited the upside in mid-run Yuan bull-attempts.

EUR walking into TLTRO2

EUR/USD searches for a bottom before the second round of TLTRO due on December 11th. The first round of the targeted LTRO program in September had greatly disappointed with only 82.60 billion euros lent to 255 banks. While the maximum amount the ECB is ready to lend stands at a distant 400 billion euros, we believe that the outcome in the TLTRO2 will be nothing close to that objective. The consensus for December take-up is 170 billion euros. We see room for more disillusionment this week. This being said, we expect consolidation in EUR-complex until the last scheduled EUR-event of the year.

Trend and momentum indicators in EUR/USD are marginally negative. We place our resistance to 1.2440/45 (MACD pivot/21-dma) and remain seller on rallies as long as this zone is not breached. The rationale behind this strategy is simple: lower the TLTRO lending, higher will be the probability of a QE. Option bets are negatively skewed pre-1.2400/20, light bids are touted above 1.2445 for today expiry.

EUR/GBP consolidates weakness below 50-dma (0.78970). The bias remains on the downside, the first line of support is seen at 0.78250 (Oct-Dec ascending base). A breakout below this base should intensify downside pressures. The key support stands at 0.77666/0.77672 (Sep 30th/Oct 1st low).

On the back of broad based JPY strengthening, EUR/JPY broke the 9-day conversion line on the downside. Given the political uncertainties before December 14th snap elections, we see choppy upside in JPY-crosses and bet for deeper downside correction through the week. Comments from Japan officials will be at the center of attention this week. It is important for the JPY-traders to watch the support that Abenomics will get from Sunday’s elections. We believe that the PM Abe will obtain the support he needs. If this is the case, than we expect JPY-crosses to take another suitable step upwards. This is only when we will consider a break above 150-offers in EUR/JPY.

EUR/JPY rebounds pre-150 resistance