China FX reserves shrank less than expected

Forex News and Events

Market waiting for Yellen (by Arnaud Masset)

With Chinese markets closed for the week and a very light economic calendar, investors will watch closely the two appearances of Fed Chairwoman Yellen. The latest job report from the US gave renewed hope for the Fed to go on with its tightening process. Indeed, the uptick in wage growth (+2.5%y/y verse 2.2% expected) will likely consolidate the Fed’s decision to implement another rate hikes. However, considering the current context we remain rather cautious as the positive trend in wage pressure is only at an early stage. It will also be interesting to see how the market’s turmoil and the high volatile environment has affected the Fed’s thinking. For now investors are wondering whether it was a good or a bad report as NFP missed expectations; they are waiting for the Fed to tell them how to take it.

Small reserves fall but heightened concerns (by Peter Rosenstreich)

Risk appetite was able to rebound on the less negative Chinese data, yet uncertainty persists. China’s reserves fell less than expected, as the PBoC data reported a decline of $99.5bn, below consensus of $120bn. However, this slower decline has not stopped the market chatter, calling for further RMB devaluations. Perhaps the strongest argument why the decline was not deeper and further expectations for devaluations is that policymakers have clearly and aggressively intervened in the forward market. Forwards do not show up in the reserves data until contract expiry. Therefore the likelihood that the headlines release underestimated the significant intervention and capital flight in January is high. That said, we continue to believe the Chinese authorities have the firepower to stabilize the RMB, suggesting additional devaluations are unlikely. In the past 18 months FX reserves have decline by roughly $800bn, a significant number however, China still has sizable reserves of $3.2trn. The current markets expectations are that the strategy of FX and bond price control is unfeasible (judging from price on long-dated risk reversal), however, this is based on current capital flight does not tapper. We remain optimistic that the monetary and policy action will begin to manifest itself in firm Chinese data. With fundamentals less pessimistic outflow should slow.

Bank of Japan: Current account balance keeps on declining (by Yann Quelenn)

Japan’s current account balance shrank to 960.7 billion yen in December from 1143 billion yen and well below forecasts of 1051 billion yen. Yet, the account balance is in surplus for the 18th consecutive month. Still, cheap energy imports and the overall weakness of the yen are helping to maintain a decent account surplus.

Indeed, in the aftermath of the Fukushima disaster in 2011, Japan relied more on energy imports as nuclear reactors were systematically shut down, so lower oil prices have worked out well in terms of the balance of payments so far. At the same time, the continued weakening of the Japanese currency has spurred overall exports, which, nonetheless, suffered a third straight month decline in December due to China’s economic slowdown. China's demand for steel and semiconductors have fallen and as a result Japanese exports are down 8.0% from last year.

We believe that the current account balance, even though positive, will keep on declining and we forecast that the surplus era will end up by year-end, marking a recession from which effects can already be seen in Japan (mixed GDP). In the event that oil prices pick up, the current account may go negative even sooner.

EUR/JPY - Monitoring The Downtrend Channel

The Risk Today

Yann Quelenn

EUR/USD is now consolidating after its last week's sharp bullish move. Daily resistance lies at 1.1387 (20/11/2015 high). Hourly support may be found at 1.0711 (05/01/2016 low). Yet, expected to show further consolidation. In the longer term, the technical structure favours a bearish bias as long as resistance holds. Key resistance is located region at 1.1453 (range high) and 1.1640 (11/11/2005 low) is likely to cap any price appreciation. The current technical deteriorations favours a gradual decline towards the support at 1.0504 (21/03/2003 low).

GBP/USD's short-term momentum is pausing Hourly resistance can be found at 1.4668 (08/02/2016 high). Hourly support can be found at 1.4081 (21/01/2015 low). Expected to show further increase. The long-term technical pattern is negative and favours a further decline towards the key support at 1.3503 (23/01/2009 low), as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200 day moving average). However, the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound.

USD/JPY is pausing around 117.00 and is still trading in a range from 116.00 from 122.00. Hourly resistance lies at 123.76 (18/11/2015 high). Hourly support lies can be found at 115.98 (20/01/2016 low). Expected to show further decline. A long-term bullish bias is favored as long as the strong support at 115.57 (16/12/2014 low) holds. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) is favored. A key support can be found at 116.18 (24/08/2015 low).

USD/CHF is pausing below parity. Hourly support is located at 0.9786 (14/12/2015 low) and hourly resistance can be found at 1.0328 (27/11/2015 high). Expected to show continued decline. In the long-term, the pair has broken resistance at 0.9448 and key resistance at 0.9957 suggesting further uptrend. Key support can be found 0.8986 (30/01/2015 low). As long as these levels hold, a long term bullish bias is favoured.

Resistance and Support: