CNH: USD/CNH Downtrend Reaffirms, Oversold On RSI, But Upticks Likely To Be Sold
Spot USD/CNH got to fresh lows of 6.9628 in Monday trade (levels last seen in the first half of 2023), amid broader USD softness as Fed independence concerns crept back into the market. We track just under 6.9700 in early Tuesday dealings, with a downtrend in the pair still intact. Note we have crept back into oversold conditions per RSI (14) (latest read around 28.3), but upticks in the pair are likely to remain sold. The 20-day EMA resistance point is under 7.0000, which is also close to earlier 2026 highs. Downside focus is likely to rest around 6.9500, then potentially 6.9000. Spot USD/CNY finished up at 6.9731, while the CNY CFETS basket tracker rose further to 98.64, fresh highs since early April last year.
- Amidst a downtrend in the USD/CNY fixing and potentially positive January yuan seasonality, risks for USD/CNH remain skewed lower, despite reaching oversold status per RSI. The yuan stands to benefit from diversification flows amid fresh Fed independence concerns.
- The USD/CNY fixing will remain in focus for signs of pushback on the stronger yuan bias, although recent error terms are sub wides.
- Our China policy team noted late yesterday: China should allow the yuan to trade with greater flexibility, giving market forces a larger role, as Beijing continues its push to boost international use of its currency, said Huang Yiping, a member of the People’s Bank of China’s Monetary Policy Committee. Foreign-exchange policy needs to become more flexible, and if market pressure for yuan appreciation intensifies, regulators should allow market forces to play a greater role, Huang argued.
- On the data front we still await Dec new loans/ aggregate finance data, while tomorrow Dec trade figures are due.
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JGB TECHS: (H6) Just Off Cycle Lows
- RES 3: 140.08 - High Jun 13
- RES 2: 139.05 - High Aug 4
- RES 1: 137.30 - High Sep 8 and key short-term resistance
- PRICE: 133.44 @ 15:44 GMT Dec 12
- SUP 1: 133.25 - Low Dec 10
- SUP 2: 132.78 - 2.0% Lower Bollinger Band
- SUP 3: 132.17 - 1.0% 10-dma envelope
Prices traded to new pullback and cycle lows earlier this week, weighed by building expectations of a December BoJ rate hike and a breach of support in futures prices. This affirms the firm downtrend that’s dominated prices since mid-September, and prices will need to challenge resistance before signaling any broader reversal.
FED: Reserves Fell To "Ample" At Just Under $3T (2/2)
The FOMC's decision this week to immediately initiate reserve management purchases (RMPs) suggests some concern by policymakers over recent funding market issues and potential further volatility at year-end, while also having an eye on building reserve capacity ahead of the major tax date in April.
- The December FOMC statement noted "reserve balances have declined to ample levels" vs abundant previously, and RMPs will be conducted "to maintain an ample supply of reserves on an ongoing basis."
- As of the meeting, reserves stood at just under $3T ($2.97T), perhaps on the high side of most estimates of where the "ample" range had been. Gov Waller estimated in July that "ample" could be closer to $2.7T.
- The $40B / month pace of RMPs is front-loaded and will taper off, with the reserve rebuild set to average about $20-25B/month. (Powell said Wednesday: "We have to keep reserves, call it, constant as a -- as it relates to the banking system or to the whole economy. And that alone calls for us to increase about $20-25 billion per month...It's also happening in the context of a temporary few month front loading to get reserves high enough to get through the -- you know, the tax period in mid-April."
- The NY Fed's guidance: "The Desk anticipates that the pace of RMPs will remain elevated for a few months to offset expected large increases in non-reserve liabilities in April. After that, the pace of total purchases will likely be significantly reduced in line with expected seasonal patterns in Federal Reserve liabilities. Purchase amounts will be adjusted as appropriate based on the outlook for reserve supply and market conditions."
FED: Trump Tells WSJ: Leaning To Warsh Or Hassett As Fed Chair
President Trump has told the Wall Street Journal in an interview Friday that he was leaning toward either Kevin Warsh or Kevin Hassett as his pick for the next Fed Chair.
- Warsh's probability of becoming Fed chair is spiking (40%, up 25pp on Kalshi in the last few minutes) on prediction markets with the interview suggesting the ex-Fed governor is neck-and-neck with previously presumptive favorite Hassett (57%).
- "In an interview with The Wall Street Journal in the Oval Office on Friday, the president said Warsh was at the top of his list. "Yes, I think he is. I think you have Kevin and Kevin. They're both -- I think the two Kevins are great," he said. "I think there are a couple of other people that are great.""
- Additionally Trump tells the WSJ that the next Fed Chair should consult with him on where to set interest rates, and that he pressed Warsh this week on "whether he could trust him to support interest-rate cuts if he were chosen to lead the central bank, according to people familiar with the meeting. Trump, in the Journal interview, confirmed that reporting. "He thinks you have to lower interest rates," Trump said of Warsh. "And so does everybody else that I've talked to." "
- "Asked where he wants interest rates to be a year from now, Trump said, "1% and maybe lower than that." "
- This is not entirely new rhetoric from Trump on rates and the associated litmus test of a low rate preference for the next Fed Chair - as such there's not much market reaction to the news, but the reporting suggests that current Fed officials Waller and Bowman may be out of the running.
