Forex Investment and Currency Trading

Despite the rebound and stabilization of USD earlier in the year, the CNY has strengthened ahead of the fourth round of US China Strategic Economic Dialogue (SED). In the last week, the USD/CNY fell 0.38%. Meanwhile, the market is building a deeper expectation of a more rapid CNY appreciation. The spread between 1Y USD/CNY NDF and spot rate fell to -415bps on June 17 from its most narrow reading in the last week of 278bps. The view is, CNY’s strength will likely continue as the May economic releases reinforce the need for more monetary tightening. Despite the expected slower May [...]

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Since early-April, the CNY/USD appreciation rate has slowed significantly to around 6.7% annualized rate in April-May, down from 17% in the first three months of the year. As a result, the non-deliverable forwards (NDF) market’s expectation for 12-month CNY/USD appreciation has also been scaled back to 6.6% from 11.7%. Is the slower CNY appreciation rate a change of course? Or is it just a normal China-style “stop” before the “go” again?
It is more likely to be the latter, and the current USD/CNY forecasts are 6.76, 6.60 and 6.30 on 3, 6 and 12-month horizons, implying 10% appreciation in 12 months’ [...]

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The slower pace of CNY appreciation has continued with a CNY/USD gain of only 0.35% since the beginning of April. Looking forward the current, more gradual pace could persist given the likely CPI moderation in 2Q and increasing signs of weaker export growth. April CPI, due next Monday, is expected to moderate slightly to about 8% from 8.3% in March. Accordingly, the chance of another interest rate hike in May has been reduced, particularly after the latest Fed rate cut further widened the US-China interest rate spread. Meanwhile, concerns over a possible export slowdown could limit the scope for CNY [...]

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1Q08 GDP growth was stronger than expected, but at 10.6% yoy was a slowdown from the 11.2% performance in 4Q07. The moderation was attributed to continued macro-tightening policy and emerging signs of weaker global demand. Understandably, net exports declined significantly due to weaker external demand, faster CNY appreciation and robust import growth. Having said that, economic momentum remained strong, supported by the brisk fixed asset investment growth at 24.6% yoy and steady domestic
consumption performance at 12.5% yoy. In addition, March industrial production rebounded to 17.8% yoy from 15.4% in February, though there are signs that this could be peaking in [...]

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