Forex Investment and Currency Trading

1 - 3 Month Outlook

The underlying pressure for CNY to appreciate is illustrated by the fact that China’s FX reserves have increased by almost $300bn so far this year. Latterly, the pace of revaluation has slowed, particularly against the US dollar, in the face of weaker growth in the OECD economies, and there have been hints that the authorities have become more growth and less inflation focused. Nevertheless, given the size of the trade surplus and strength of FDI inflows, the positive trend in the yuan is expected to continue in the short term.

6 - 12 Month Outlook

Real GDP growth slowed in Q2, although the sequential growth rate actually picked up and the production, investment and retail sales data published towards the end of the quarter was firm. The contribution to the annual growth rate from net exports continues to diminish, while consumption shoulders more of the burden of expansion. Meanwhile, CPI Inflation continues to retreat from its early year highs. Base effects and lower food prices suggest that the disinflationary trend will continue over the remainder of the year, but the government has little room for complacency, especially given a tendency for PPI inflation to pick up. Given a less auspicious external growth environment, there has been some speculation that the government is about to signal a reversal of the tightening trend in monetary policy, but any changes in the short term are likely to be largely cosmetic. The government may also use the room facilitated by lower headline inflation to scale back its price controls. Oil and electricity prices remain well below cost and this has resulted in power shortages.

The government wants to bring real deposit rates into positive territory over the medium term, but progress is likely to be slow for now. Increases in reserve requirements will continue to be used as a mechanism to mop up excess liquidity and ensure that monetary growth is kept under control, although there are concerns about the impact on the banking system. Despite the more conservative pricing of NDFs of late, external political pressures for appreciation are unlikely to wane.