Moody's lower China's credit rating outlook to negative

Forex News and Events

China long adjustment process toward stabilisation (by Arnaud Masset)

It’s been a while already that China has lost its title as world’s main growth driver as the economy continues to adapt to the new normal of slower growth, shifting toward a domestic generated growth from an export driven one. Since mid-2015, the yuan has been under increasing pressure - falling almost 6% against the US dollar - as the PBoC stepped in to try to manage a soft landing for the economy. Since January 2015, the People’s Bank of China cut rates five times, which brought the 1-year lending rate down to 4.35% from 5.60%, while lowering the reserve requirement ratio for major banks also 5 times, bringing the ratio down to 17% from 20%. However, as the market expects further downside to the Chinese economy and anticipates the Chinese central bank to provide further support to the economy, which would over the medium to long-term weaken further the yuan, this create a situation in which investors started to cash in rapidly. As a result, China experienced massive capital outflow over the last few months, which made its forex reserve to melt like snow under the sun.

In such an environment - and we didn’t talk about the state-owned zombie economy yet - Moody’s decision to lower the outlook on China’s credit rating to negative from stable - but maintained the Aa3 investment grade - wasn’t a big surprise. The rating agency argued that the rapid depletion of FX reserves and rising concerns about China’s ability to make the required fiscal adjustments to face the new weak global demand environment justify the negative outlook. In our opinion, given China’s gloomy economic outlook, we won’t be surprised to see credit rating downgrade as soon as this year. On the currency side, we expect further yuan weakness as the PBoC will have no choice to ease further its monetary policy as the government starts to implement tighter fiscal conditions. China is therefore not done yet with capital outflow.

Strong jobs data are not sufficient for markets (by Yann Quelenn)

February ADP employment change is set to be released today. The market expects the data to print at around 188k new jobs, lower than in January when 205k new payrolls had been added. Despite spectacular misses over the last few years, it has been often a good indicator of US non-farm payrolls that will be released this Friday.

We do not believe that this data will have a massive impact as it seems that whatever release, the probability that the Fed will rate hike in March will remain very low. We rather consider that the global economy is the main driver for a rate hike and the current trend is negative, in particular the Chinese slowdown looks deeper than expected. In addition, deflationary pressures and negative interest rates are becoming the new normal for most countries. This is why we do not think that we may talk any more about policy divergence for the U.S. especially when lingering low oil commodity prices keeps on adding downside pressure on U.S. inflation. The better jobs market conditions have anyway not pushed inflation despite current (timid) wages growth.

This is why we keep on wondering about the true state of the U.S economy. The Fed should add back the patience word on the rate hike topic at the next FOMC meeting the 16th of March. Expectations on the dollar should weaken and we are bullish on the medium term on the EURUSD which should be back towards 1.1000.

EUR/JPY- Successful test of the support at 122.45.

The Risk Today

Peter Rosenstreich

EUR/USD continues to retrace the rebound that started from the low at 1.0810.The short-term technical structure still suggests a further bearish move. Hourly resistance lies at 1.0891 (i01/03/2016). Hourly support can be found at 1.0810 (29/01/2016 low). Expected to show continued weakness. 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 is now consolidating. Hourly support lies at 1.3836 (29/02/2016 low) and hourly resistance is given at 1.4043 (26/02/2016 high). The technical structure suggests further decline. The road is wide open to stronger support at 1.3657 (11/03/2009 low). 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 lifted by a strong bullish momentum, as can be seen by the break of the short-term resistance found at 114.00 (29/02/2016 high). Stronger resistance is given at 114.91 (16/02/2016 high). Hourly support can be located at 113.74 (base) then next support lies at 112.16 (intraday low). We favour a long-term bearish bias. Support at 105.23 (15/10/2014 low) is on target. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems now less likely. Another key support can be found at 105.23 (15/10/2014 low).

USD/CHF is moving sideways between the support at 0.9950 and the resistance at 1.0034 (29/02/2016 high). The break of the support at 0.9857 (30/12/2015 low) suggests further selling pressures. In the long-term, the pair is setting highs since mid-2015. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours a long term bullish bias.

Resistance and Support: