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CN50USD

Trader thoughts - China firmly back in the markets spotlight

Chris Weston
Head of Research
Mar 15, 2022
As we look ahead to the FOMC meeting we now see the swaps market pricing an 11% chance of a 50bp hike this week.

If they ‘only’ go 25bp, which seems a lock (in my opinion), then we have a 70% chance of a 50bp priced for the May meeting. 7 hikes are priced for the full year. It's little wonder then why US Treasuries are getting smashed and why USDJPY – the proxy of US rates – is well above 118.00 now.

Whether I'm looking at futures positioning, options skew, or just basic price action it feels as though the trade-off is unclear – on one hand the risks are for a more hawkish Fed this week, but yet the market is already long of USDs and positioned for it. How does this leave the USD faring in the wake? My gut tells me there are small downside risks, but gut instinct is hardly a strategy.

While Fed policy and geopolitics are clear drivers of sentiment, China is also a dominant thematic, with Chinese equity markets savaged on a number of major drivers – growth concerns, due to lockdowns in Shenzhen and Langfang City are hard to gauge and it feels very 2020.

Putin’s relationship with Xi and how involved China could get in assisting Russia is clearly one the market needs far more understanding on. Tencent’s huge fine for violating AML regs, and the SEC threatening to delist Chinese ADRs if the firm refuses to open their books are also in the mix – it’s all going on and clearly, enough to cause one-way directional moves in the H-shares, HK50 and A50, all indices offered by Pepperstone if you want to express a two-way directional view.

The concern of course, if short China is whether the National Team advise stability in the market is the way to go and we see a strong reversal in the trend – that may well play out today, especially with the PBoC widely expected to cut the Medium-lending Facility by 10bp to 2.75% (due at 12:20AEDT).

USDCNH daily chart

Near-term USDCNH has come back on to the radar in a big way, it’s clear the weakness in the yuan is resonating in AUD selling - so if USDCNH break 6.4000/6.4100 then AUDUSD could pull towards the low 71c, and base metals may further weaken – watch today's CNY fixing at 12:15 AEDT. If the PBOC lift the mid-point by more than expected it could be the catalyst for a move through 6.4000. Clearly, if Chinese equity markets are going to undergo another round of heavy selling, then the CNH will likely follow suit. One for the radar.

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