PBOC can keep the Fed in its leeway for holding rates longer

[walid]

POBC can keep the Fed in its leeway for holding rates longer

• After volatility in the Chinese equities market, the turn came to the Forex market this week with 2 devaluating actions could contain the market sentiment.
• USDCNY rose in the Asian session to 6.45 after it has been trading steadily near 6.21 before this Aug. 10.
• The PBOC's Forex reference action came after cutting of the Chinese holding of treasuries by $180b showing that there is a relationship between the matter of debt and deficit and the current economic stance in China which can get better with lower renembie to boost the Chinese exports.
• Shanghai composite index is still holding what it gained back recently trading around 3900 points following significant drop in June brought it down from its peak at 5178.
• China tried before to show the markets that the USDCNY is not having only one way to go and again by this devaluation it shows that there can be Yuan depreciation again.
• The answers from china can start to show that was for reflecting the interest rate outlook differential between US and China, as the first is about to hike and the second is still adopting cutting rates for boosting the economy which has decelerated recently.
• The Chinese can easily say the mantra that was for reflecting the current fundamentals which should be reflected by Forex rates.
• The Chinese action can take from the renembie creditability, as a reserve currency giving to other currencies such as the European currencies.
• The Chinese reaction put the greenback in check, as it can take from the Chinese holding of US debt.
• The demand for safe haven which contained the market sentiment lowered the sovereign bonds yields in US, EU and also Asia, while the gold could be able to surge to a higher place above $1100 reaching $1123 until now.
• There are rising doubts now about the next FOMC meeting action, as the members of the committee can take into their account the Chinese action and also the uncertainty generally about china delaying the first interest rate hiking since 2006.
• While the odds of raising the interest rate in US next September were rising up following the release of July US labor report which has shown adding of 215k out of the farming sector.
• The comments which came out from the Fed's governors were to signal that the labor market is still in progress, the housing market is gaining momentum and there is no worries about the current tame inflation pressure, as the economy is still in an up cycle, the wages can boost the prices later.
• While the impact of the oil prices falling can diminish later next year to watch higher broad inflation figure and also higher core figures.
• The gap between the broad inflation figures and the core figures can get tighter within the first quarter of next year, as the oil prices could find support by the end of the first quarter of this year.
• But currently, it is obvious that there is no inflation pressure on the Fed to make it in rush to raise rates.
• We have seen last week the release of June PCE which has shown rising yearly by only 0.3%, after rising by 0.2% in May. These rates are far away from the Fed's 2% inflation target over the medium term.
• While taking an action to start raising rates in US currently can push the greenback up and suggest higher probabilities of meeting negative PCE yearly rates which cannot be welcomed by the Fed.
• The Fed's vice president Stanley Fisher has tried to put all of these perspectives together in his comments last week describing why the FOMC refrained from providing a clear forward guidance to the markets last meeting on Jul. 29.

Have a good day
Kind Regards
FX Market Strategist
Walid Salah El Din
Mob: +20 12 2465 9143
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