Fade Rallies In China Stock Market While SGD Likely To Appreciate Against USD
China’s central bank (PBoC) is signalling that financial stability is paramount
Published on 20 March 2017
At the current juncture, we continue to believe that it’s worth fading rallies in China’s onshore equity markets. Also, credit risks are up in China. As a result, the variables that matter for the stance of monetary policy in China is financial stability rather than growth, inflation, employment or the balance of payments.
This is the main reason why the PBoC unexpectedly raised some interest rates last week rather than the anticipated 25 basis-point hike by the US Fed last week.
The key implication is that we expect market interest rates in China to continue to rise as the PBoC uses the seven-day repo rate as the main policy tool rather than the benchmark lending rate, the required reserve ratio (RRR) or the USD/CNY fixing.
Note that the seven-day repo rate has now broken above 3.4% (which was the sustained top in 2016, see Figure 1). In our view, the seven-day repo rate could be in the 3.5 to 4.0% range in second quarter of 2017.
Figure 1: Intraday, China seven-day repo rate likely to break to 3.5- 4% range in Q2 2017 as the central bank tightens liquidity to control high debt in the economy Source: Banjaran Asset Management, Bloomberg
In our view, the main metrics of financial stability that the PBoC is watching is off balance sheet lending by banks – which rose by 30% year on year (YoY) at end-2016 (and was mentioned explicitly in the Q4 2016 monetary policy report along with including off-balance-sheet items as part of the macroprudential assessment framework that previously was not included).
In addition, the 18 March data release on February property prices is also an important metric that the PBoC is worried about in terms of financial stability – in our view. The February property price data showed that in Beijing, new home prices rose 24% YoY – while Shanghai saw a 25% YoY rise and prices in Shenzhen rose 14% YoY.
USD/SGD headed to 1.38 in near term
In our view, USD/SGD could head to 1.38 in around two weeks’ time. A weakening of the USD along with recent improvements in trade and property prices data are likely to be the main drivers of an SGD appreciation against the USD.
In addition, the technical picture shows that the short-term momentum of USD/SGD is south. In the longer term, we expect USD/SGD to trade in the 1.45 to 1.50 range by end 2017 as growth weakens in the second half of 2016 (Singapore) and the US Fed hikes policy interest rates by more than what the market expects. As a result, continue to hedge USD strength risks if you hold SGD.
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