The World Overall

One Financial | Andrei Wogen| finance.wogen@gmail.com| 01-29-15

Chinas Yuan
The world is currently engaged in a massive currency war and
China is participating as well. Looking at the USD/CNY weekly
chart (to the right) it shows how active the PBoC has been recently in
weakening the Yuan in order to help increase export activity and
spur overall economic activity. The next line of resistance in the
USD/CNY pair is right about at the the 6.4000 level (chart of this to
the right; red line) and with continued weakness in the Chinese
economy, I expect the PBoC will likely continue to use the currency
as a policy tool and continue to weaken it in order to try and stay
with and even ahead of other central banks who are weakening their
currency.
The question is though, what is next for PBoC policy? Speculation
has been rising that they will ease further with the first thing coming
to mind of most investors being a cut in the RRR rate. The RRR
being the amount of money that Chinese banks have to keep on
reserve. Past cuts in this area have particularly targeted rural banks
with the aim of helping the more rural and normal Chinese man
and woman. But at this point there has been no indication of what
the PBoC wants to do except that they want their currency to
continue to weaken. Looking at the SSE Composite index and
Shanghai index both have risen overall over the past few months on
bets that more easing will come from the PBoC. Other options in the
PBoCs tool box include pumping more liquid into the banks via
repos and other methods as well as the traditional method of cutting
interest rates. Cutting interest rates seem to be last thing the PBoC
wants to do though as they rarely cut rates, opting instead to pump
money into Chinese banks. Selectively. Whatever the bank does
though we will likely not be telegraphed as usual by the bank until
they actually do something. Their lack of commitment to be open
continues to be a concern of the markets and analysts and continues
to harm the economy as well.
So as for what the PBoC will do going forward to ease further, it is
really up in the air. My bet is that they will continue to go the way
they have been, weakening the currency combined with RRR cuts
and more added liquidity into the banking system. Whatever they
do though, lets hope it actually helps to revive the Chinese
economy. It continues to be weak, both domestically and in terms of
their trade. But with more reforms likely to come form the Chinese
government authorities the central bank will have to do its part soon
to help relieve the pressure that has been and will likely continue to
be felt by those government reforms.