PBOC steps up cash injection ahead of Chinese New Year

Thursday, January 21, 2016

The PBOC once again stepped up efforts to shore up capital markets as it injected 400bn yuan (roughly $60bn) into financial markets using reverse repo agreements. The favoured method of boosting funds in capital markets was the single largest addition in almost three years and brought the net increase in liquidity for the month so far to roughly 1 trillion yuan. With businesses and households gearing up for the week long Chinese New Year celebrations, set to start on the 8th of February the central bank is attempting to keep borrowing costs as it tries to reverse the significant flight of capital that has dominated trading activity since the start of the year. The offshore yuan exchange rate weakened for the third straight sessions against the dollar, building firmly on the previous session’s close and trading towards 6.6150 at the time of writing.

Risk aversion prompted continued buying of gold as jittery investors piled into the safe haven asset. Spot prices for the precious metal closed above $1,100/oz yesterday as intraday moves attempted to gain a foothold back above the 100 day moving average, towards $1,107/oz. However, appetite for prices at these levels was limited and while flows into the SPDR Gold Trust ETF have been building since the start of the year, from 642.37 tonnes to 660.30 tonnes at close of business yesterday, we expect any significant upside to be capped as investors react to central bank intervention and support from policymakers around the world, particularly in China.

The dollar remains very much in vogue despite struggling with direction in recent sessions as it remains well supported towards the 50 day moving average. Given the recent market volatility the USD has held up considerably well with significant gains against the GBP offsetting some of the losses against the JPY with the dollar index trading confidently around 99.000 against a basket of major currencies. We expect this period of sideways consolidation to continue in the near term as uncertainty and nervousness among investors remains high but with the US Fed expected to raise interest rates steadily throughout 2016 we expect the dollar to strengthen accordingly.    

Off-shore yuan stabilises around 6.6000 as volatility drops

CNH Curncy Offshore Deliverable 2016 01 21 07 59 53

Spot gold prices trade back above $1,100/oz

GDTRGOLD Index SPDR Gold Trust 2016 01 21 08 18 24

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CPI

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ECB Rate Decision

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Philly Fed Business Outlook

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Initial Jobless Claims

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Topics: Gold, DXY, GBP, PBOC, CNH
More from: Kash Kamal