Forex Investment and Currency Trading

Spot USD/CNY has largely traded sideways and is likely to stay within a 6.80-6.85 range in the near term. The announcement of the CNY4 trillion fiscal stimulus helped to stabilize local equity markets briefly. The Shanghai Composite Index rose 8.3% within a few trading days after the stimulus package announcement on November 9 but has since surrendered some of its gains as risk aversion re-emerged and recession fears spread throughout Asian nations. After the slew of weak October macro data, Chinese authorities stepped up on their initiatives to support export growth. The Ministry of Finance announced more export boosting measures, including higher export tax rebates for 3,770
products effective December 1. The products that will benefit are mostly labor intensive manufacturing products and some will enjoy tax rebates as high as 13%. This came on the heels of a similar move earlier this month, involving 3,486 exported products. Recent moves will likely help to arrest the downside risks to China’s external sector performance but are unlikely to provide a strong boost for export growth prospects amid slowing global demand. Meanwhile, the NDF market continues to price in a premium which remains excessive relative to the stable spot USD/CNY. This could be partly due to lingering expectations that the PBoC will engineer a weaker currency as one of
the anchors for monetary policy maneuvers, which suggests that the premium may be reduced going forward once the conviction eases. Monetary easing will likely be implemented via more rate cuts with a preference for a stronger CNY to promote imports and stimulate local demand.

Scope for the Divergence Between Spot and NDF to Narrow