PBOC injects funds amid liquidity concerns

Tuesday, January 05, 2016

A semblance of calm returned to Asian equity markets overnight after a bearish start to the week which saw the negative sentiment spill over to the European and US sessions. The PBOC stepped up efforts to shore up capital markets by initiating another weighty reverse repo programme, its biggest since September last year. The central bank injected 130bn yuan (just under $20bn) into capital markets by offering seven day reverse repos at 2.25% and it seems that central bank intervention will play a significant role in 2016 as liquidity remains tight and risk averse investors remain on the side-lines. After weakening significantly against the USD yesterday as the onshore yuan hit 6.5383, a level last seen in early 2011, the Chinese currency displayed some modest strength overnight, trading back below 6.5200 against the greenback and we expect further central bank intervention will see spikes in market volatility.

Despite the Chinese central bank’s best efforts to instil renewed confidence in global markets gold is on track to close higher for a second straight session as risk averse investors increase holdings of the safe haven asset. Spot prices for the yellow metal closed 1.1% higher yesterday towards $1,075/oz and activity overnight has seen the precious metal build on the yesterday's close and trade higher, testing appetite for prices towards $1,080/oz. SPDR Gold Trust ETF holdings remain firm, just above 642 tonnes after dipping to a seven and a half year low of 638.80 tonnes towards the end of last year. With tensions in the Middle East between Saudi Arabia and Iran rising and ongoing market volatility we could see an increasing appetite for gold investments.

The Aussie dollar and Canadian dollar managed to regain some of yesterday’s losses against the US dollar after the PBOC intervention as investors welcomed the support. The commodity currencies had faced a sharp sell off yesterday with the AUD losing as much as 1.8% against the USD at one point while the CAD lost as much as 0.9% to the greenback. It would be fair to say that the first session of the New Year started on the back foot but with central bankers in China going to considerable lengths to stabilise markets we may begin to see risk appetite slowly improve, however, markets will likely be acutely sensitive to any near term shocks and another run on stocks is not out of the question.

Onshore yuan regains some ground after yesterday's losses

CNY Curncy China Renminbi Spot 2016 01 05 07 54 05

AUD well supported towards the long term moving averages

AUD Curncy Australian Dollar Sp 2016 01 05 08 33 41

Events for today

0855

DE

Dec

Unemployment

0900

UK

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Halifax House Prices

0930

UK

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Markit Construction PMI

1000

EZ

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CPI

1445

US

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ISM New York

Topics: Gold, CNY, PBOC, AUD
More from: Kash Kamal