cnh – in weakness, there is strength

September 21, 2016

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SEE PAGE 8 FOR IMPORTANT DISCLOSURES

FX Insight

CNH – In Weakness, There Is Strength

FX Vols And Fed Rate Hike Expectations

We look for upside risks to the USD for the rest of the year. This

is in view of USD strength typically leading into US elections in

the past and more importantly (for the CNH), the potential for a

rate hike by the Fed in Dec. We also expect FX volatility to rise in

view of increasing risk events in the last quarter of the year.

CFETS RMB Index Finds Tentative Floor at 94 For a good part of the year, we have noted the positive

correlation between the CFETS RMB index and the DXY index.

However, the post Brexit period has shown that CFETS RMB index

is more correlated with Fed rate hike expectations. It is the

absence of Fed hike expectations (rather than USD strength) that

has allowed PBOC room to let out the depreciation pressure in

the yuan. The last quarter of the year could be a very different

environment. Given our expectations for investors to keep Fed

rate move at the fore of their minds for the rest of the year, the

CFETS RMB index is likely to see a tentative bottom around 94.

Prefer to Long CNH Against EUR, SGD, NZD While we see upside risks to the USD, we think the risk-reward

ratio is too lean. We expect PBoC to limit the depreciation in the

CNY trade weighted index in the next 3 months. CNY and CNH will

depreciate against the USD but at a smaller magnitude compared

to other currencies. That implies a potential for CNH to

outperform other non-USD currencies that has higher beta. We

see opportunity to long CNH against EUR, SGD and NZD.

Analysts

Saktiandi Supaat

(65) 6320 1379

[email protected]

Fiona Lim

(65) 6320 1374

[email protected]

Christopher Wong

(65) 6320 1347

[email protected]

Leslie Tang

(65) 6320 1378

[email protected]

September 21, 2016 2

CNH: In Weakness, There Is Strength

FX Volatility To Pick Up, Fed Hike Expectations To Remain Elevated

In our recent note on CNY: Likely Weaker But No One-Off devaluation,

we have mentioned our view of upside USD bias for the rest of the year.

This is in view of USD strength typically leading into US elections in the

past and more importantly (for the CNH), the potential for a rate hike by

the Fed in Dec. FX volatility has picked up from the summer lull but gains

have been modest, even ahead of key FOMC and BOJ event this week.

Volatility is unlikely to remain at the current levels (Chart 1). We expect

implied FX vols to rise in view of increasing risk events in the last quarter

of the year.

Chart 1: Implied Vols Should Rise

Source: Bloomberg, Maybank FX Research

It is no coincidence that the CNY Hibor interbank rates have been on the

rise. The overnight rate was fixed at 23.683%, a high not seen since Jan.

Rumours are that PBoC has been intervening in the Hong Kong interbank

market to discourage offshore players from shorting the CNH.

Chart 2: Overnight CNH Hibor Rates On A Rapid Rise

Source: Bloomberg, Hong Kong TMA, Maybank FX Research

5-Year Average At 9.6



The sudden surge in yuan bearish bets after months of calm came in

tandem with the expectations for the Fed to raise the target rate within

the year. PBoC could continue to limit CNH depreciation in this

environment.

Chart 3: Are We Looking At Another Dollar Surge Like 4Q 2015?


The Dec rate hike in 2015 was preceded by a period of USD strength and

the rate hike was followed by a tremendous amount of depreciation

pressure on the CNH and CNY in Jan 2016 (not necessarily due to the rate

hike). In fact, the CFETS RMB index has a stronger positive correlation

with Fed rate hike expectations rather than the USD per se. We

anticipate rate hike expectations to remain elevated for most of 4Q

2016.

Chart 4: Strong Correlation Between CFETS RMB Index and UST 10y

Yield




Chart 4 shows a strong correlation between CFETS RMB index and the 10-

year UST yields of around 0.899 base on values in the past year. This is in

contrast to the correlation between CFETS RMB index and the DXY index

which is also positive but at a weaker 0.626, shown in Chart 5.

Chart 5: Positive But Weaker Correlation Between CFETS RMB index

and DXY index



Calling The Tentative Bottom Around 94

Chart 6: We See A Tentative Bottom Around 94 for CFETS RMB Index


For a good part of the year, we have highlighted the positive correlation

between the CFETS RMB index and the DXY index – that in periods of USD

weakness, CNY will strengthen less than other currencies; in periods of

USD strength, CNY will weaken less than other currencies. Whilst more

reactive to market forces than before, CNY is still in the midst of getting

aligned to its fundamental value and PBoC seizes opportunities to release



the depreciation pressure in the CNY in the absence of USD strength.

However, that positive correlation broke down in the post Brexit period

which saw significant CNY weakness against most currencies (including

the USD). After doing the correlation analyses above, we conclude that it

is the absence of Fed hike expectations (rather than USD strength per se)

that has allowed PBOC room to let out the depreciation pressure in the

yuan. The last quarter of the year could be a different environment and

PBoC may defend CNH and CNY more aggressively than before. Given

our expectations for investors to keep Fed rate move at the fore of their

minds for the rest of the year, the CFETS RMB index is likely to see a

tentative bottom around 94.

Opportunities to long the CNH against EUR, SGD, NZD

While we see upside risks to the USD, we think the risk-reward ratio is

too lean. In fact, part of the USD strength has been attributed to the

steepening of the UST yield curve recently. The steepening of the USD

rates curve over the last month was more of a function of markets’

expectations that central bank/s will reduce the buying of long dated

govies and until the curve steepen even more, it may not actually

benefit the USD. Hence, we see a ceiling for USDCNH bulls.

With Fed hike expectations likely to be lofty, we expect PBoC to limit

the depreciation in the CNY trade weighted index in the next 3 months.

CNY and CNH will depreciate against the USD but at a smaller magnitude

compared to those of other major trading partners. In other words, CNH

could outperform other non-USD currencies like the EUR, GBP, KRW.

From the technical charts, we selected a few trades that generate better

risk-reward ratio and seek to long CNH against EUR, SGD and NZD.

Chart 7: Weekly EURCNH- Rising Wedge Beckons A PullBack


We look for EURCNH to pullback towards the 7.22 (38.2% Fibonacci

retracement of the Apr-Aug 2015rally) as the current rising wedge

approaches the apex. First target at 7.34 (200-DMA) before 7.22. Spot

ref. at 7.47. 7.55 marks the stop-loss at year high.



We have been bearish on the SGDCNH and we continue to be so. We see

potential for SGDCNH to head lower towards the 4.7750-support (38.2%

Fibonacci retracement of the big 2016 rally). Spot ref at 4.9020. Stop-

loss at 4.95.

Chart 8: SGDCNH (Weekly) Shows Signs of Correcting Lower


Chart 9: NZDCNH Weekly Has Bearish Potential



We see bearish potential for NZDCNH as volatility picks up. Possibility of

further RBNZ easing could also undermine the NZD. The weekly chart

shows ebbing bullish momentum and signs of stochs falling from

overbought levels. Strong barrier is seen around 4.9590 (23.6% Fibonacci

retracement of the Jun-Sep rally) and should the Sep high of 4.9489 be

revisited, we could potentially see a heads and shoulders formation.

Optimizing CNH trades

In fact, we think that CNH trades can be optimized in four different

environments. We envision the environment in the next three months to

be biased towards the upper left quadrant shown below given our base

case assumption for a Fed hike in Dec and oncoming risk events that

could raise volatility and dampen risk appetite along with carry trades.

Source: Maybank FX Research



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Published by:

Malayan Banking Berhad

(Incorporated in Malaysia)

Saktiandi Supaat Christopher Wong Fiona Lim Leslie Tang

Head, FX Research Senior FX Analyst Senior FX Analyst Senior FX Analyst

[email protected] [email protected] [email protected] [email protected]

(+65) 63201379 (+65) 63201347 (+65) 63201374 (+65) 63201378

cnh – in weakness, there is strength

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