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Leading banks still bullish on yuan case despite policymakers’ nudge By Reuters

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© Reuters. Illustration photo of a China yuan note

By Winni Zhou

SHANGHAI (Reuters) – China’s move to cool a rising yuan stands little chance of stopping further gains, international banks say, as the strength of the world’s number two economy and a near-record yield advantage drive big and steady inflows.

Over the weekend, the People’s Bank of China (PBOC) scrapped a requirement for banks to hold a reserve of yuan forward contracts, removing a guard against depreciation and sending the currency down 1% for its steepest drop since March.

Yet an identical move three years ago ultimately proved ineffective, and investors say this time the conditions are even more likely to buoy the yuan, perhaps as far as 6.5 per dollar.

“In all previous instances, the impact of the regulatory change was temporary,” said Eugenia Victorino, head of Asia strategy at Swedish bank SEB in Singapore.

“We continue to expect the yuan to remain on an appreciation trend, with approaching 6.60 by end-2021,” she said.

Goldman Sachs (NYSE:) forecasts yuan, last quoted at 6.7436 , will hit 6.5 per dollar in 12 months.

Much as in 2017, the PBOC’s move follows a long spell of appreciation. The yuan has strengthened more than 6% since late May and just closed its best quarter in a dozen years as China leads the world out of the coronavirus pandemic and soaks up capital flows.

Foreign holdings of Chinese government debt rose at the fastest pace in more than two years last month, with the spread between Chinese () and U.S. 10-year () government bond yields holding near record highs scaled in July. In another nudge for the yuan to weaken, Beijing granted $3.4 billion in outbound investment quotas last month, the first fresh permission for such flows since April 2019.

Yet analysts say China’s economy, projected to keep growing as the rest of the world shrinks, could attract enough capital to fuel a self-perpetuating yuan rise.

Macquarie Bank’s head of China economics Larry Hu suggested continued bond market inflows combined with limited unaccounted for outflows, could keep lifting the currency and in turn drawing more inflows.

“The million-dollar question now is whether the latest surge in the CNY marks the tipping point. Maybe, but no one knows for sure,” he wrote in a note.

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Forex

Index on its Backfoot as Virus Cases Accelerate

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IBEX 35 Index, Covid, Economic Outlook – Talking Points:

  • IBEX 35 Index drops as Covid infections accelerate
  • Index continues to underperform regional peers
  • GDP outlook and deficit pose headwinds for economy

The Ibex 35 Index finished Wednesday’s trading session on its backfoot – down 1.67% – amid a worsening outbreak of Covid infections across the country and the broader European Union. Year to date performance for the Spanish index sits nearly -29 percent lower. This compares to the Euro Stoxx 50 index at -15 percent, and the FTSE 100 at -23 percent.

IBEX 35 Index (Daily Price Chart)

IBEX 35 Price Chart

Created with TradingView

While other EU countries are seeing rising cases, Spain continues to size an outsized rate of infections. The total case count rose above the 1 million-mark Wednesday afternoon, as Spain’s Health Ministry reported 16,973 new confirmed cases. A new round of prevention measures, including perhaps government mandated shutdowns, is likely to keep any bullish momentum from forming in the index.

Cumulative Covid-19 cases in Key European Economies

Cumulative covid cases Spain EU

Source: Our World in Data

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Spain’s budgetary problems also pose a problem for its economy – a problem that existed before the pandemic, and now exacerbated by it with the loss of economic output. Spain does plan to use just over 70 billion in grants made available from the EU recovery fund. However, it is not clear yet if Spain will accept more funding in the form of loans from the EU. The existing budgetary concerns are possibly giving Spanish policy makers concern over adding to the deficit.

IMF Economic Outlook Projections

IMF Economic Outlook

Source: IMF World Economic Outlook

Moreover, Spain faces one of the deepest economic contractions within the Euro Area according to the IMF’s latest economic outlook projections, with this year’s drop in GDP forecasted at -12.8%. However, the IMF expects Spain to outperform for 2021 with a projected 7.2% climb in growth versus France at 6.0%, and Germany at 4.2%. A value play could be argued at current prices, but the uncertainty given the virus and other factors in play would make that a highly uncertain gamble.

–Written by Thomas Westwater, Contributor for DailyFX.com

Contact and follow Thomas on Twitter @FxWestwater





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EUR/USD May Challenge 2-Year Resistance. Fiscal Talks Making Headway

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2020 Election, EUR/USD, Presidential Debate, EUR/USD Analysis, Polling Data – Talking Points

  • Third presidential debate ahead – will there be greater clarity this time around?
  • Democrats, Republicans are making progress on fiscal talks, lifting sentiment
  • EUR/USD could challenge 2-year resistance area between 1.1936 and 1.1965

13 DAYS UNTIL THE US PRESIDENTIAL ELECTION

It is officially less than two weeks until the November 3 election and polls continue to show Democratic nominee Joe Biden in the lead. However, the spread between him and incumbent President Donald Trump has somewhat narrowed after it burst open following the first presidential debate. Looking ahead, markets will be closely watching the third and final one on Thursday.

2020 US Election Polls

Chart showing 2020 election

Source: RealClearPolitics

Fiscal talks continue to dominate market mood as policymakers scramble to put a bill forward. House Speaker Nancy Pelosi’s spokesman said both sides are “closer to being able to put pen to paper to write legislation”. The big question continues to be whether another stimulus bill can be passed before the November 3 election, with issues like local government aid and liability protection for firms prolonging talks.

The third and final presidential debate is coming up in less than 36 hours, and the non-partisan Commission on Presidential Debates (CPD) has made an interesting new amendment. The organization said that while each candidate is speaking, it will mute the microphone of the other candidate to ensure each has enough time to convey their message.

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EUR/USD Analysis

EUR/USD has bounced from the previously-broken 1.1698-1.1720 support range and may now challenge 2-year resistance zone between 1.1936 and 1.1965. Capitulation could signal an underlying lack of confidence in the pair’s upside potential – at least in the short run. On the hand, breaking that multi-layered ceiling could signal the start of a bullish resumption.

EUR/USD – Daily Chart

Chart showing EUR/USD

EUR/USD chart created using TradingView

— Written by Dimitri Zabelin, Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or@ZabelinDimitrion Twitter





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Tesla Beats Earnings Expectations, Shares Pop

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Nasdaq 100 Price Forecast:

Nasdaq 100 Outlook: Tesla Beats Earnings Expectations, Shares Pop

Fan-favorite electric carmaker Tesla (TSLA) released its quarterly report after the close Wednesday, treating investors with an earnings beat and a quick rally in share prices. The reported outline a continuation of profitability for Tesla, despite a decline in the average price of vehicles sold. Still, the more affordable models should begin to pressure competitors in the increasingly competitive space.

Suffice it to say, Tesla shareholders might have reason to remain optimistic in the months ahead as the company continues to expand its production plants across the globe. An increase in production capability should allow Tesla to reduce its cost per vehicle, simultaneously decreasing sale prices – pressuring competitors further. Either way, a rise in Tesla’s share price should help the Nasdaq 100 in the second half of the week as it is responsible for more than 3% of the index.

Elsewhere, earnings from companies that would be considered more closely aligned with a traditional economy also outperformed expectations. Rail company CSX (CSX), appliance-maker Whirlpool (WHR) and Chipotle (CMG) all beat Wallstreet estimates, seeing CSX and WHR shares rise in after-hours trading. Critically, the upbeat earnings from all three corporations might hint at a subtle recovery in the underlying economy that may be required for continued strength in the broader US indices.

Nasdaq 100 Price Chart: 4 – Hour Time Frame (September 2020 – October 2020)

nasdaq 100 price chart

In terms of price action, the Nasdaq 100 appears to be contained by resistance around the 11,800 mark and support near 11,600. Together, the two horizontal barriers may see the tech-heavy index trade sideways until big-ticket earnings from Apple, Amazon and Facebook are released next week. Nevertheless, a break through either level might see a continuation unfold. In the meantime, follow @PeterHanksFXon Twitter and check back at DailyFX for earnings coverage from a macroeconomic perspective.

Equities Forecast

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–Written by Peter Hanks, Strategist for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX





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