CHINA: 2H Liquidity Challenge Points To RRR Cuts
The second half of the year will see challenging liquidity for the Chinese economy.
- The medium term lending facility used by banks has significant maturities in the second half, and a significant redemption schedule in bonds.
- Recent data shows too significant outflows in China related ETF’s with the Vanguard FTSE EM ETF (tk VMO) reporting the largest outflows in 4 years of over US$500 (per BBG).
- Liquidity will remain a key focus for authorities in the second half of the year.
- With greater autonomy given to the regions in the recent plenum, it is expected that issuance could reach as much as CNY1tn in this period.
- To support liquidity Chinese authorities have been pro-active already with multiple policy changes (cut in repo rate and reduction in 1 year policy rate).
- The next policy announcement is likely to be a reduction in the Reserve Requirement Ratio for banks. A cut of 25-30 bps in the RRR could release over CNY1tn of liquidity according to estimates.
- This liquidity would help stabilize financial markets and allow for the issuance schedules to proceed, allowing regions to prioritize the funding for 2025.
- Whilst most commentary on Government Bond yields has been to highlight concerns as to their decline, ironically those concerns could be a support to the regions in 2H 2024.
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USDCAD TECHS: Watching Support
- RES 4: 1.3977 High Oct 13 ‘23 and a key M/T resistance
- RES 3: 1.3899 High Nov 1 and a key resistance
- RES 2: 1.3846/55 High Apr 16 and the bull trigger / High Nov 10 2023
- RES 1: 1.3734/3792 High Jun 27 / Jun 11
- PRICE: 1.3687 @ 16:29 BST Jun 28
- SUP 1: 1.3626/3590 Low Jun 25 / Low May 16 and a key support
- SUP 2: 1.3547 Low Apr 9
- SUP 3: 1.3512 50.0% retracement of the Dec 27 - Apr 16 bull cycle
- SUP 4: 1.3478 Low Apr 4
USDCAD has recovered from its most recent lows. Price has recently traded through the Jun 12 low of 1.3680, and 1.3677, the 50-day EMA. The break signals scope for a continuation lower, potentially towards key support at 1.3590, the May 16 low. Clearance of this level would threaten a bullish theme. The medium-term trend outlook is bullish and a stronger resumption of gains would refocus attention on key resistance at 1.3846, Apr 16 high.
US TSYS: Month/Quarter-End Positioning Outweighs Dovish Data React
- It appeared month/quarter-end positioning outweighed Friday's dovish reaction to Core PCE inflation that was on balance a little softer than expected in May, printing 0.08% M/M vs consensus of 0.1% that had tilted higher with an average unrounded 0.13% M/M.
- Treasury futures tracked higher after UofM Inflation expectations were revised lower: 1Y inflation expectations: 3.0% (cons 3.2, prelim 3.3) in June final after 3.3% in May; 5-10Y expectations: 3.0% (cons 3.1, prelim 3.1) in June after 3.0% in May.
- Support was short lived, however, as rates as well as equities reversed course, extended lows heading into the London close. No obvious headline driver, trading desks widely cited month end, positioning squaring ahead of the first round of French elections (June 29-30).
- Treasury futures extended lows: TYU4 taps 109-27 (-13) with attention on a firm short-term support at 109-26+, the 50-day EMA. A clear break of this average would signal scope for a deeper retracement, towards 109-00+, the Jun 10 low.
- Curves bear steepening: 2s10s +5.384 at -37.376 (lest inverted since the beginning of the month), 5s30s +4.490 at 17.151.
- In-line with the steepening, projected rate cut pricing through year end looks steady to mildly higher vs. pre-data levels (*): July'24 at -10% w/ cumulative at -2.5bp at 5.302%, Sep'24 cumulative -18.6bp (-17.5bp), Nov'24 cumulative -27.6bp (-26.6bp), Dec'24 -47.3bp (-45.3bp).
- Look ahead: shortened Fourth of July holiday week next week, FOMC minutes on Wednesday, Thursday closed, June employment data next Friday.
AUDUSD TECHS: Key Short-Term Resistance Remains Intact For Now
- RES 4: 0.6771 High Jan 3
- RES 3: 0.6751 76.4% retracement of the Dec 28 - Apr 19 bear leg
- RES 2: 0.6729 High Jan 12
- RES 1: 0.6714 High Jun 16 and the bull trigger
- PRICE: 0.6670 @ 16:28 BST Jun 28
- SUP 1: 0.6576 Low Jun 10 and a key support
- SUP 2: 0.6558 Low May 8
- SUP 3: 0.6539 50.0% retracement of the Apr 19 - May 16 bull leg
- SUP 4: 0.6497 61.8% retracement of the Apr 19 - May 16 bull leg
AUDUSD continues to trade inside a range that highlights two important levels; a key resistance at 0.6714, the May 16 high, and a key support at 0.6576, the Jun 10 low. Both levels represent important short-term directional triggers. Clearance of 0.6714, would open 0.6751, a Fibonacci retracement. A break through 0.6576 would expose 0.6558 initially, the May 8 low. Looking at MA studies, they are in a bull-mode set-up and highlight an uptrend.
