USD/CNH Chinese yuan (AKA renminbi RMB)

Today, the Chinese yuan hit its lowest level against the dollar since late 2012 with USD/CNH briefly trading above 6.27 before testing the rising support line at current levels around 6.2561.


Past performance is not necessarily indicative of future results.

“China says it wants to discourage speculators from assuming the yuan is a one-way bet or in other words is only headed higher given that it has been on a path of steady appreciation since it was de-pegged from the dollar in 1995.” source: How long will the US tolerate a weaker yuan?

[I]"According to the latest data from the People’s Bank of China, the central bank bought about 174 billion yuan worth of dollars in March…

“The PBOC’s recent engineering of the depreciation of the yuan was part of a bid to drive out speculators and make the currency more of a two-way bet.”[/I] source: Wall Street Journal

The latest SSI data show that 91% of retail traders are short the USD/CNH currency pair which means they are long the Chinese yuan relative to the US dollar.

SSI is a contrarian indicator to price action. The fact that the majority of traders are short gives signal that the USD/CNH may continue higher. The trading crowd has grown further net-short from yesterday and last week. The combination of current sentiment and recent changes gives a further bullish trading bias.

Retail traders short USD/CNH might gain confidence from today’s news that the US is increasingly using yuan to pay for goods from China.

[I]“Although the corridor remains dominated by the U.S. dollar, data suggests that the [U.S.] is increasingly using the [yuan] to support its corporates that want to reach more suppliers in mainland China,” said Michael Moon, Asian-Pacific head of payments at Swift. “This is good news for the internationalization of the [yuan] as a world payments currency.”[/I]

source: Use of Chinese Yuan by U.S. Jumps - MoneyBeat - WSJ

RT reports that “Diversifying trade accounts from dollars to the Chinese yuan and other Asian currencies such as the Hong Kong dollar and Singapore dollar has been a part of Russia’s pivot towards Asian as tension with Europe and the US remain strained over Russia’s action in Ukraine.”

If Russia continues the trend of gradually switching from the US dollar to Asian currencies and other countries follow suit, this could lead to a long term decline in USD/CNH, USD/HKD and USD/SGD.

[I]“China’s overseas borrowings are leaving the country increasingly vulnerable to a rise in U.S. interest rates, potentially creating funding problems for some companies and tighter conditions for the financial system overall.”[/I]
source: Overseas loans expose China to US rate hikes - MarketWatch

In other news, HSBC today reported its final Composite and Services PMI figures for China for the month of July. Composite PMI came in at 51.6 vs. 52.4 in the prior month, snapping a three-month streak of improvements. The Services PMI printed at 50.0 vs. 53.1 for June, its lowest reading since the report was first published in August 2011.

The Chinese Yuan fell against the US Dollar after the disappointing PMI numbers crossed the wires.

In addition, the Speculative Sentiment Index (SSI) shows that the ratio of long to short positions in USD/CNH stands at -11.77 meaning there are 11 retail traders who are short for each trader who is long. Yesterday the ratio was -11.16.

SSI is a contrarian indicator to price action, so the fact that the majority of traders are short gives signal that USD/CNH may continue higher. The trading crowd has grown further net-short from yesterday and last week. The combination of current sentiment and recent changes gives a further bullish trading bias.

The Chinese Central Bank triggered the biggest one-day decline in the value of the Yuan in over 20 years.


[I]Created with Marketscope/Trading Station Desktop; prepared by James Stanley[/I]

This Yuan devaluation has created a ripple-effect, with commodities and commodity currencies selling-off.

[I]Talking Points:[/I]
[ul]
[li]USD/CNH (offshore) advances over +2% overnight after yesterday’s +1.8% gain.
[/li][li]Diversification flows hurting US Dollar, particularly versus the Euro.
[/li][li]See the August forex seasonality report.
[/li][/ul]

The Chinese Yuan will have to wait until late 2016 before the IMF will consider it as a reserve currency to be included in in the SDR basket. The Executive Board of the IMF approved the, previously discussed, extension of current SDR basket until September 30, 2016. The review of the SDR basket valuation occurs every five years and was due for December 31, 2015 but will now be extended an additional nine months.

In comparison to the large moves made by the Yuan’s last week - after multiple sharp declines following the People’s Bank of China move to change its fixing mechanism - this expected extension had relatively small effect on the Yuan. However, excluding last week’s volatility, the 0.35 percent increase in USD/CNH was the largest in six months. In the chart above, we can see the movement in the USD/CNH compared to bigger moves during the change in exchange rate method early in the month.

According to the latest readings from the Speculative Sentiment Index (SSI), the ratio of long to short positions in the USD/CNH stands at 1.32 meaning there are 1.32 long positions for every short position among retail traders. Yesterday the ratio was 1.29; 56% of open positions were long.

SSI as a contrarian indicator to price action, and the fact that the majority of retail traders are long gives signal that the USD/CNH may continue lower. The trading crowd has grown further net-long from yesterday and last week. The combination of current sentiment and recent changes gives a further bearish trading bias.

[B]Chinese Growth Falls Below 7% for First Time Since Financial Collapse[/B]

Summary:
[ul]
[li]Chinese GDP printed below 7% for the first time since 2009.
[/li][li]This raises concerns for a slowdown in Asia, but the expectation for more stimulus from Beijing has served to off-set the near-term weakness that such a print would bring.
[/li][li]For those looking for macro cues, watch US Oil (WTI), as this could serve as a leading indicator for macro trends moving forward.
[/li][/ul]

[B]US Treasury Adjusts Yuan Stance, Sees China Capital Outflows to Increase[/B]

[I]Talking Points:[/I]
[ul]
[li]The Treasury estimates Chinese capital outflows of $250 billion in the first half of 2015
[/li][li]Views China’s Renminbi remains below its appropriate medium-term valuation
[/li][li]US Treasury highlights IMF’s concerns and solutions for China’s economy
[/li][/ul]

[I]WASHINGTON (MarketWatch) – Details from the International Monetary Fund’s new special drawing rights basket shows that the euro will see the biggest drop to make way for inclusion of the Chinese yuan. Effective Oct. 1, the new weighting of SDR currencies will be 41.73% for the U.S. dollar, 30.93% for the euro, 10.92% for the renminbi, 8.33% for the Japanese yen and 8.09% for pound sterling. The current basket is 41.9% dollar, 37.4% for the euro, 11.3% for the pound and 9.4% for the yen.[/I]

source: article on MarketWatch by Steve Goldstein

There is no doubt that Yuan joining SDR basket is a milestone event, but for investors and traders, how would you benefit from this new development?

In her latest article on DailyFX.com, Renee Mu discusses a list of opportunities that you may be able to use to invest in China at the moment or in the near future.

DailyFX quantitative strategist David Rodriguez sent me the following alert this morning:

“overnight rollover charges in the USD/CNH have surged as the PBOC has unofficially made it substantially more expensive to hold CNH-short positions. This is consistent with their preference to defend the CNH against speculation, and theres no question that they’re feeling the heat on the surge in the CNH vs CNY spread. (more on that here)”


image source: Bloomberg

Complete analysis by Bradley A. Kearns in his article on DailyFX.com

Forget the Fed, recommends Goldman, and watch how the dollar trades vs. the yuan

The Speculative Sentiment Index reading for USD/CNH shows ratio of long to short positions in the USD/CNH stands at 1.17 as 54% of traders are long.

We use our SSI as a contrarian indicator to price action, and the fact that the majority of traders are long gives signal that the USD/CNH may continue lower.

Renee Mu’s new daily digest on DailyFX.com focuses on market sentiment, new developments in China’s foreign exchange policy, changes in financial market regulations and Chinese-language economic coverage in order to keep DailyFX readers up-to-date on news typically covered only in Chinese-language sources.

In her latest daily digest, Renee Mu focuses on market sentiment, new developments in China’s foreign exchange policy, changes in financial market regulations and Chinese-language economic coverage in order to keep DailyFX readers up-to-date on news typically covered only in Chinese-language sources:

[I][ul]
[li]The PBOC strengthened the daily fix for the Yuan against the Dollar to a three-week high.
[/li][li]China’s FX regulator said the Brexit result has not brought major impact to China’s capital flows.
[/li][li]The Chinese government increased fiscal expenditures to 8.9165 trillion Yuan in the first half of 2016.
[/li][/ul][/I]