An outlook on the CNH drivers.

  • #US- #China Phase One to be signed.
  • Reinstatement of semi annual talks with China (outside trade talks), which Trump abolished earlier during his tenure.
  • Expectations for China trade balance to rebound in Dec (out tomorrow).
  • Expectations by Chinese analysts GDP will hold the 6% growth line, 6.1-6.2% expected (Out on Friday).
  • 2019 saw 289B Yuan reduction in bad loans although loans to the real economy still on the rise. Risks remain.( Loan data tomorrow and on Thursday).
  • Car sales have slowed.
  • PBOC injecting substantial stimulus.
  • PBOC lowering daily USDCNY fixings.
  • Break through the bottom of the rising wedge, squaring of CNH short positions vs USD but not in the least vs JPY past weeks: CNHJPY, a popular cross in that part of the world, has rallied over 4% since start of Dec for instance.

I’m focusing on the offshore Yuan here as that’s the one we, non local Chinese, have access to. We can overlay the CNY moves but they’re less accessible and much more controlled by PBOC.

An army of positives or are they? We have had all the upbeat headlines by now as per above but then today SCMP reported China’s government warning that Phase One is only the beginning of the battle, reducing the P1 signature to a reality show level, which we already knew tbh. Let’s face it, China mostly bought all those beans and pork as they struggle with diseases at home. But that’s not a totally objective observation ;).
We also know by now how solid trade deals are when it comes to His Royal Orangeness. Anything that won’t please him during the negotiations of Phase II or those semi-annual talks could mean a complete setback to Phase Zero as fast as the time to tweet it.

PBOC on the other hand will still be there come 2020. Injections, another possible RRR cut, cutting the new loan prime rate(LPR) another few bps later this month, supporting local businesses and admittedly respecting the non competitive devaluation spirit. Keeping control over the currency by not letting CNY get out of hands has helped to cool down CNH specs the time it took to come to a partial agreement with US. But without front running any future events, that set up is not 100% guaranteed going forward. They have their “counter-cyclical factors” to toy around with as pleases them in case further “non-intervention” would be necessary.

Knowing what we know, for this CNH rally to remain sustainable we’re going to need data to solidly back it up as politics may not be there to support it come the 16th. Tomorrow we’ll have the trade data, then we’ll have 2 pieces of loan data tomorrow and on Thursday and finally Friday a data slew , growth in the lead, which should decide upon the next direction of the offshore Yuan.

Since we’ve broken sub the rising wedge, through the 50% fib of the Mar-Sept rally(6.93s) and the 55WMA, techs are still looking down for now. Depending on the data we’re going to see we may see it down to the 38.2% of the Mar’18-Sept’19 rally in the 6.83s, the 100WMA around 6.80 or even if we get serious positive surprises a final shake out down to the 50% of that longer term rally into the 6.71 area. I hear some of you already saying the data will be good anyway, they have to show an improvement, a hold in growth to inspire confidence and show how good they weathered the trade storm. But let’s just focus on the numbers and see where they come out. That’s what we trade in the end.

So how to trade it then? I did take most of the trade tension rally when it happened into the 7.10S. Since then I’ve been sidelined, not being overly sure how deep the recovery would take us. But it’s slowly starting to itch. The numbers will tell me what to do and where to get in and spoiler alert, I’m looking to get short CNH again at some stage.

Assuming we get positive surprises, I will wait 6.80 and below. I have a feeling that if we get positive prints, there may be more to shake out and models will get additional triggers to buy CNH on breaks of 6.87-83 and 80 if seen. Sub 6.80 then I will get involved, legging in down to that 50% fib. There’s the 200 WMA waiting around 6.75 which will be an additional anchor point in between. That gives about a 1.5% range to assess what’s going on. If ever we break sub the Mar-Apr ’19 lows I will have to rethink this strategy.

If we get positive/neutral prints, I will raise the “involvement range” to 6.80/87 as my base idea, as per above, is that CNH should at some stage lose the political/trade deals support. This scenario is adaptable as the price action might tell us we don’t even reach that range. Which brings me to scenario 3, not my base case for now as I don’t expect overly negative surprises at this very stage.

Bad data should see an immediate bottom in place and I expect USDCNH to retake the 55WM (6.91s) and the 50% fib of that shorter term move pretty quickly. I’ll try pay up on the first break but won’t go and pay silly prices straight away as the lower end of that wedge may offer some initial resistance come 6.97/98.A break through that area though would set us up for a return to the 7.10/20 range imo, my first expected target zone of my scenario.

I will equally keep a close eye on that CNHJPY cross and … gold. China ( with Russia and a few others) have been the main buyers of the shiny stuff through the end of 2019 but, Middle East spikes taken out of the equation, have been quieter since the start of 2020 in the expectation of P1 signing, continued PBOC injections, less stress on the CNY/CNH. We only have to look at daily charts to see that from 2am gmt, China’s open, they have been involved the whole of Dec for instance.
If data would come out negative, I suspect we may see another buying round start. Bad data, lower rates, diversification correlations…

So that the scene set for this week’s CNH. As usual, we trade, there are risks to any scenario but hopefully this helps a bit.

Happy hunting.

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