China Pre-Empts Call to Beef Up Yuan (Mario Singh, April 17th 2012)

What a difference 2 weeks make.

Two weeks ago, China reported stellar numbers in its Purchasing Managers’ Index (PMI), with numbers coming in at a one-year high of 53.1 in March, compared to a reading of 51 in February.

As the world’s largest exporter, the PMI is an important number for traders to gauge the strength of the Chinese economy.

However, on Friday the 13th just four days back, the horror of a slowing economy came crashing back down to earth. China’s GDP figures had come in at 8.1%, a reading worse than economists’ estimates of 8.4%. The previous figure was 8.9%.

Despite the dismal figures, China announced a surprise doubling of the Yuan trading band over the weekend. Since May 2007, The People’s Bank of China (PBOC) had kept the daily trading band at 0.5%. This means that the Yuan was able to move 0.5% on either side of the daily fixed rate.

With the announcement, the PBOC now allows a 1% move on either side of the daily fixed rate.

There are essentially three reasons for the PBOC move:

1) It helps to control inflation
2) It helps to stimulate stronger domestic demand
3) It helps the export sector to deal with any possible appreciation of the Yuan

There are two other strategic purposes of the move, although China may not officially say it. The first deals with the upcoming meeting among the IMF, World Bank and G20 finance chiefs in Washington at the end of this week.

In my opinion, the move to widen the trading band was strategically done before the meeting to placate calls for China to strengthen its currency even further.

The second reason is that it helps to move China closer towards its intended goal of having a convertible currency soon in the near future. As it is, China’s regulators raised quotas for foreigners buying onshore stocks and bonds to USD80 billion from USD30 billion this month, as part of its qualified foreign institutional investor scheme (QFII).

Top News This Week

Europe: German ZEW Economic Sentiment, Thursday, 17th April, 5pm. I expect figures to come in below 21 (previous figure was 22.3).

New Zealand: CPI q/q. Thursday, 19th April, 6.45am. I expect figures to come in at 0.5% (previous figure was -0.3%).

Trade Call

Short USD/SGD at 1.2520

Late last week, the Monetary Authority of Singapore (MAS) announced solid first quarter GDP results for 2012.

GDP was 1.6% higher than the corresponding period last year. On a quarter-on-quarter basis, GDP actually grew 9.9%, reversing the 2.5% contraction in the preceding three months.

The MAS also expects the “inflation gauge” or the Consumer Price Index, to come in between 3.5% to 4.5% this year, up by one percentage point.

To alleviate the inflationary pressure, the MAS is expected to tighten monetary policy and allow the Sing dollar to appreciate faster.

On the Hourly chart, USD/SGD is moving in a 97-pip range, with Resistance located at 1.2544 and Support located at 1.2447. With the move by MAS, our bias for USD/SGD is to the downside.

We will go short once prices fall to 1.2520. A stop loss of 50 pips is located above the Resistance level at 1.2570.

We will have two targets on this trade, exiting the final position at 1.2420.

Entry Price = 1.2520
Stop Loss = 1.2570
1st Profit = 1.2470
2nd Profit = 1.2420

(Source: MarioSingh.com)