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USDCNY continues to recover after the pair slumped to the lowest level since December 2015 last Friday. The rebound, long-awaited as the broad-based USD weakness has caused the pair to decline over the past 4 months, is facilitated by PBOC’s announcement to remove the requirement for banks to hold the equivalent of 20% of clients' FX forward positions as reserve for a year at 0% interest. For more than a decade, China has been implementing reforms in its currency, with the ultimate goal of achieving a floating exchange rate regime and convertibility for renminbi – a movement widely described as renminbi internationalization. However, this report seeks to explain that the government has only been moving back and forth, without making significant progress in transforming renminbi into a market-oriented exchange rate.

'811-Reform'

On August 11, 2015, PBOC abruptly devaluated renminbi by -2%. On trading, CNY plunged -1.8% against USD, the biggest one-day decline since 1994. Besides, PBOC announced a new renminbi fixing mechanism, suggesting that the components used in setting that daily fixing rate include previous’ day’s close, FX demand and supply conditions and movement of major currencies. The market believed that the new mechanism had paved the way for renminibi to join IMF’s special drawing right (SDR). PBOC explained that it had to devaluate the currency as the midpoint had been diverging from the market rate for some time. However, we believe it was a means to rescue the slowdown in economic growth.

While inclusions of demand/supply conditions, as movement of major currencies in its calculation marked an effort to make renminbi more market-oriented, the surprising devaluation had dampened market confidence on the currency and evidenced that the currency remained under manipulation to the authority despite the rhetoric of market-orientation.

Panic selling of renminbi following the so-called '811-reform' triggered the government adopt a series of capital control measures, including the abovementioned 20% FX reserve ratio effective from October 2015. Other capital control measures include strengthening supervision of foreign exchange purchases by foreign-held non-resident accounts (NRA), monitoring firms’ foreign exchange buying and tightening supervision of bank clients’ foreign exchange deals.

FX Reserve

Another prominent feature of China’s defense of renminibi depreciation is the massive selloff of FX reserve. US$630B of FX reserve was evaporated from Aug-2015 to Dec-2016. During the period, renminbi deprecated -10% against US dollar. PBOC aggressive selling sent FX reserve below US$ 3 trillion in January this year. There is no coincidence for the consecutive monthly rise in FX reserve and USDCNY’s decline since February.

CEFTS index

Remaining under pressure for the rest of 2015 and in 2016, renminbi’s weakness had been a result of concerns over further government devaluation in light of soft economic growth and a strong US dollar amidst rising expectations of Fed funds rate hike and reflation trade upon Donald Trump’s victory as the US president. Renminbi depreciation despite stringent capital control measures led to the 're-introduction' of the CEFTS index in December 2016. Attempting to shift the market’s focus from renminbi vs US dollar to renminbi vs a basket of currencies, the government expanded the number of currencies in the CFETS basket to 24 from 13 in January 2017.

Counter-Cyclical Factor

Less than four months ago, the government indicated that it considered adding a 'counter-cyclical factor' in its fixing mechanism. As such, components in the daily fixing calculation would include previous day’s close+ changes in renminbi’s value against a basket of currencies+ counter cyclical factor. The authority explained that the new component would help prevent renminbi from being excessively affected by external volatility. Yet, it revealed no details about how the countercyclical factor would be computed or its weight in the new fixing mechanism. Introduction of the counter-cyclical factor evidenced that the government has chosen to control the currency movement, instead of increasing its transparency and taking a step forward in currency internationalization.

Indeed, we doubt whether the Chinese government is committed to achieving a floating exchange rate regime and convertibility for renminbi. Over the past decade, it has been moving one step forward and then several steps backward in its internationalization process. We are not hopeful that renminbi would become a global currency in the next decade, let alone a major reserve currency.

The pair extends strong rally into second straight day, as fading concerns over North Korea / Hurricane Irma’s impact drastically reduced safe-haven demand and pound got additionally inflated by upbeat UK inflation numbers.

The cross dented target at 145.70 (daily cloud top) on today’s strong acceleration higher and may extend recovery rally on sustained break above the cloud.

The price is currently riding on the wave C (from 141.18 trough) of five-wave cycle from 139.30 (24 Aug low) which could extend towards its Fibo138.2% Expansion at 146.18 and 146.80 (03 Aug lower top) in extension.

Daily studies turned into full bullish setup and are supportive for further advance.

However, overbought conditions suggest corrective action in the near term (no signal yet), as daily cloud is narrowing and will twist next week that may also attract for stronger pullback.

Initial support lies at 114.79 (broken FE 100.0%), followed by session low /55SMA at 143.90 and rising daily Tenkan-sen at 143.45.

Key near-term support lies at 143.25 (daily cloud base/Fibo 38.2% of 139.30/145.71 ascend).

Res: 145.70, 146.18, 146.80, 147.05
Sup: 144.79, 144.19, 143.90, 143.45

Crude oil has strongly declined after the commodity monitored the $50 level. Key support is given at 45.40 (17/08/2017 high). Strong resistance can be found at 50.43 (31/07/2017). Expected to show continued short-term bearish move.

In the long-term, crude oil has recovered after its sharp decline last year. However, we consider that further weakness are very likely. Strong support lies at 35.24 (05/04/2016) while resistance can now be found at 55.24 (03/01/2017 high).

Silver has failed to reach strong resistance at 18.65 (17/04/2017 high) while support can be found at 16.58 (15/08/2017 high). The commodity lies in an uptrend channel. Expected to show another leg higher.

In the long-term, the trend is rater negative. Further downsides are very likely. Resistance is located at 25.11 (28/08/2013 high). Strong support can be found at 11.75 (20/04/2009).

Gold has seen increased buying interest, clearing rising trend-line. Hourly support is given at a distance 1326 (gap low). Key resistance is located at 1375 (06/07/2016). Stronger support lies at 1204 (10/07/2017 high). Expected to show continued increase.

In the long-term, the technical structure suggests that there is a growing upside momentum. A break of 1392 (17/03/2014) is necessary ton confirm it, A major support can be found at 1045 (05/02/2010 low).

Bitcoin's buying interest is getting stronger again.Technical picture remain bullish as long as key support hold. Monitor the key support at 4078. Strong support lies very far at 3599 (22/08/2017 low). Key resistance can be located at 4921 (01/09/2017 high).

In the long-term, the digital currency has had an exponential growth. There are decent likelihood that the asset will reach $10'000.

EUR/CHF has sharply declined near the resistance area between 1.1356 and 1.1472 Further medium-term sideways moves are favoured. Expected to show further sideways moves.

In the longer term, the technical structure has reversed. Strong resistance is given at 1.20 (level before the unpeg). Yet, the ECB's QE programme is likely to cause persistent selling pressures on the euro, which should weigh on EUR/CHF. Supports can be found at 1.0184 (28/01/2015 low) and 1.0082 (27/01/2015 low).

GBP/JPY – 143.80





The British pound found good support at 141.20 and has rallied from there since, dampening our bearishness and suggesting the fall from 147.75 has ended at 139.35 instead, hence upside bias is seen for this move to extend further gain to 146.00 and later towards resistance at 146.80, however, break of latter level is needed to signal the correction from 147.75 has ended and bring further subsequent rise to 147.30-40, then retest of this recent high which is likely to hold on first testing.  



Our preferred count is that larger degree wave V with circle is unfolding from 251.12 with wave (I) 219.34, (II): 241.38 and wave (III) is subdivided into 1: 192.60, 2: 215.89 (23 Jul 2008) and wave 3 ended at 118.87 earlier in 2009. The correction from there to 162.60 is wave 4 which itself is a double three and is labeled as first a-b-c ended at 151.53, followed by wave x at 139.03, 2nd a ended at 162.60, 2nd b at 146.75 and 2nd c leg of wave 4 ended at 163.00. Therefore, the decline from 163.00 to 116.85 is now treated as wave 5 which also marked the end of larger degree wave (III), hence wave (IV) major correction has commenced for retracement of the wave (III) from 241.38 and upside target at 183.95-00 (50% Fibonacci retracement of the wave (II) from 241.38) had been met, a drop below 160.00 would suggest wave (IV) has ended at 195.85, bring decline in wave (V) for initial weakness to 130 (already met) and 120.




On the downside, whilst pullback to 145.00 cannot be ruled out, reckon 144.50-60 would limit downside and bring another rise later. Below 144.00 would defer and risk weakness to 143.00 but only break of previous resistance at 143.00 (tentatively wave i top) would defer and risk weakness to 142.45-50, having said that, still reckon downside would be limited to 142.00 and support at 141.20 should remain intact, bring another rebound later.  



Recommendation: Buy at 144.70 for 146.70 with stop below 143.70.



The long-term downtrend from 570.99 (29 Feb 1980) is labeled as an impulsive wave with III with circle ended at 129.77 (20 Apr 1995) and the corrective rebound to 251.12 (20 Jul 2007) is treated as wave IV with circle and the wave V with circle selloff from 251.12 has possibly ended at 116.80 (almost reached our indicated target at 116.00) and major correction has commenced from there and indicated upside target at 183.90-00 (50% Fibonacci retracement of 251.10-116.85) had been met, reckon upside would be limited to 199.80-90 (61.8% Fibonacci retracement) and bring wave (V) decline in later part of 2017.

EUR/GBP is trading lower. However, as long as prices remain below the resistance at 0.9176 (declining trendline), the short-term technical structure is biased to the downside. Hourly support is given at 0.9095 (11/09/2017). Resistance lies at 0.9306 (29/07/2017 high).

In the long-term, the pair has largely recovered from recent lows in 2015. The technical structure suggests a growing upside momentum. The pair is trading above from its 200 DMA. Strong resistance can be found at 0.9500 (psychological level).

AUD/USD is consolidating lower after the pair surged towards 0.8125 (08/09/2017 high). Hourly support can be found at 0.8029 (intraday high). Key resistance is given at 0.8164 (14/05/2015 high). Expected to further consolidate.

In the long-term, the trend is largely negative since 2011. Key supports stands at 0.6009 (31/10/2008 low) . A break of the key resistance at 0.8295 (15/01/2015 high) is needed to invalidate our long-term bearish view.