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10 Mar 2014
Asia EM Express: Chinese metal markets fall on default contagion woes
FXStreet (Łódź) - Copper and iron ore prices on Chinese markets plunged on Friday raising concerns over the country's growth prospects and the stability of its financial system, which is weakened, among others, by such practices as “using metals as collateral for loans,” as Greg Gibbs, FX Trading Strategist at RBS points out.
According to the analyst the drop in the price of metals “appears to be fears of contagion from the reported default on a bond interest payment by a relatively small solar company in China.”
“The fear may be that China will allow some other smaller weak companies to default and this could affect lending that has been collateralised by copper and iron ore. If borrowers fail to pay debts, the lenders may receive copper or iron ore,and then sell these commodities creating an excess of supply that would push prices down.”
Furthermore, China's benchmark interest rate for short-term interbank financing dropped to the lowest level in 21 months while the seven-day bond repurchase rate opened on Monday at 2.2%, the lowest since April last year.
Economic data
Over the weekend various pieces of Chinese data were released including Trade Balance numbers which revealed that the $31.86B surplus registered in January shifted to a $-22.98B deficit, against forecasts of only narrowing to $14.50B. On an annual basis exports dropped 18.1%, following a 10.6% increase and against consensus of 6.8% growth while imports came in better than expected at +10.1%, slightly up from the previous 10% rise.
Sebastien Galy from Société Générale comments: “I don't think a weaker trade balance confirms my thesis of a long term overshoot in CNY. I suspect it tells us that the size of the financial activity masquerading as trade is of such scale it has significantly distorted national accounts and notions of where the financial risks are.”
Chinese February CPI data, released on Sunday, showed a 2% increase year-on-year, following a 2.5% rise in January, as expected. Month-on-month inflation climbed 0.5%, down from +1% and below projections of 0.8% growth.
In the opinion of Tim Condon from ING: “Below-expected inflation lowers the bar to PBoC easing in the event growth concerns become more pressing. We expect the CPI data to boost risk appetites in Asia today.”
Previously on Friday Singapore's Foreign Reserves, the total of a country's gold holdings and convertible foreign currencies held in its central bank, rose to 274.0B in February from 271.5B in January.
The FX Reserves released by the Reserve Bank of India increased to $294.36B from $293.41B, while the amount of lending by the Indian financial system grew 14.3% down from 14.8%.
Technicals
Weak Chinese economic data as well as a higher USD/CNY fix resulted in a drop in USD/CNH towards 6.1300. Other Asian EM currencies acted similarly, although IDR for example remains strong, especially against the MYR.
The Westpac Institutional Bank team of analysts see SGD and INR as other Asian currencies which could be bought on dips this week.
“SGD NEER looks cheap (as it sits below the mid-point of the band), while USD/INR should find good selling resistance above 62.00 in terms of the 1 month NDF (note the 200 day moving average comes in at 62.21).”
According to the analyst the drop in the price of metals “appears to be fears of contagion from the reported default on a bond interest payment by a relatively small solar company in China.”
“The fear may be that China will allow some other smaller weak companies to default and this could affect lending that has been collateralised by copper and iron ore. If borrowers fail to pay debts, the lenders may receive copper or iron ore,and then sell these commodities creating an excess of supply that would push prices down.”
Furthermore, China's benchmark interest rate for short-term interbank financing dropped to the lowest level in 21 months while the seven-day bond repurchase rate opened on Monday at 2.2%, the lowest since April last year.
Economic data
Over the weekend various pieces of Chinese data were released including Trade Balance numbers which revealed that the $31.86B surplus registered in January shifted to a $-22.98B deficit, against forecasts of only narrowing to $14.50B. On an annual basis exports dropped 18.1%, following a 10.6% increase and against consensus of 6.8% growth while imports came in better than expected at +10.1%, slightly up from the previous 10% rise.
Sebastien Galy from Société Générale comments: “I don't think a weaker trade balance confirms my thesis of a long term overshoot in CNY. I suspect it tells us that the size of the financial activity masquerading as trade is of such scale it has significantly distorted national accounts and notions of where the financial risks are.”
Chinese February CPI data, released on Sunday, showed a 2% increase year-on-year, following a 2.5% rise in January, as expected. Month-on-month inflation climbed 0.5%, down from +1% and below projections of 0.8% growth.
In the opinion of Tim Condon from ING: “Below-expected inflation lowers the bar to PBoC easing in the event growth concerns become more pressing. We expect the CPI data to boost risk appetites in Asia today.”
Previously on Friday Singapore's Foreign Reserves, the total of a country's gold holdings and convertible foreign currencies held in its central bank, rose to 274.0B in February from 271.5B in January.
The FX Reserves released by the Reserve Bank of India increased to $294.36B from $293.41B, while the amount of lending by the Indian financial system grew 14.3% down from 14.8%.
Technicals
Weak Chinese economic data as well as a higher USD/CNY fix resulted in a drop in USD/CNH towards 6.1300. Other Asian EM currencies acted similarly, although IDR for example remains strong, especially against the MYR.
The Westpac Institutional Bank team of analysts see SGD and INR as other Asian currencies which could be bought on dips this week.
“SGD NEER looks cheap (as it sits below the mid-point of the band), while USD/INR should find good selling resistance above 62.00 in terms of the 1 month NDF (note the 200 day moving average comes in at 62.21).”