PBOC Archives - the patient investor

September 24, 2016

Gold respects support

10-Year Treasury yields are retracing to test the recent support level at 1.60 percent but the trend remains upward.

10-Year Treasury Yields

The Chinese Yuan is easing against the US Dollar, with USDCNY in a gradual up-trend as the PBOC manages the decline in order to conserve foreign reserves. This is likely to alleviate immediate selling pressure on the Yuan, both from capital flight and borrowers covering on Dollar-denominated loans.

USDCNY

Spot gold respected support at $1300/ounce. Breakout above the falling wedge (and resistance at $1350) would signal another advance.

Spot Gold

* Target calculation: 1375 + ( 1375 – 1300 ) = 1450

Rising interest rates and low inflation are bearish for gold but uncertainty over US elections, Europe/Brexit, and the path of the Chinese economy contribute to bullish sentiment.

Gold stocks serve as a useful counter-balance to growth stocks in a portfolio. If there are positive outcomes and a return to economic stability, growth stocks will do well and gold is likely to underperform. If there is instability and growth stocks do poorly, gold stocks are likely to outperform.

July 6, 2016

Gold surges as the Pound and Yuan fall

The Yuan is sliding against the Dollar, with USDCNY breaking through resistance at 6.60. Expect further capital flight, both from residents and offshore investors. Borrowers will also seek to repay Dollar-denominated loans and replace them with facilities in the local currency, adding further pressure on the Yuan.

USDCNY

The PBOC has been encouraged by fading prospects of further rate rises from the Fed, with 10-year Treasury Yields falling to a new all-time low of 1.37 percent, compared to 1.40 percent in 2012.

10-Year Treasury Yields

….And the Pound falling to a 30-year low.

GBPUSD

Falling currencies and lower long-term interest rates are both good news for gold bugs, with spot gold surging to $1370/ounce. Expect retracement to test the new support level at $1300/ounce. Respect of the band of support at $1280/$1300 is likely and would signal another advance, with a target of $1400/ounce*.

Spot Gold

* Target calculation: 1300 + ( 1300 – 1200 ) = 1400

February 18, 2016

Gold: PBOC makes its move

China’s PBOC made its move against the hedge funds on Monday, while many hedge fund managers were enjoying a long weekend in the Hamptons. With more than $3 Trillion of foreign reserves, this is a fight that the PBOC is likely to win, provided it stands firm. Hedge funds betting on a collapse of the Yuan can leverage their positions, but that makes them vulnerable to margin calls. Driving the Yuan below 6.50 to the Dollar may force some to cover their shorts, which would further strengthen the beleaguered currency.

USDCNY

China’s sell-off of foreign reserves has caused the Dollar to fall, in the midst of a flight to safety. Retracement that respects resistance at 97.50/98.00 would indicate a decline to test primary support at 93.00. Decline of 13-week Twiggs Momentum below zero warns of a primary down-trend.

Dollar Index

Flight to safety has spiked demand for Gold. Expect retracement to test support between $1150 and $1200/ounce. But respect of either level would confirm a trend reversal (after recovery above $1200 completes a higher trough).

Spot Gold

August 13, 2015

A currency war has begun….

The Federal Reserve, Bank of England, European Central Bank and Bank of Japan all expanded their balance sheets (commonly referred to as quantitative easing or QE for short) post-2008 to counteract a contracting money supply and prevent a deflationary spiral. These actions also have the beneficial effect of weakening the currency and improving international competitiveness.

China was considered immune because of its persistent current account surplus and $4 Trillion in foreign reserves. But the recent sharp contraction in Chinese exports to the EU suggest otherwise.

The People’s Bank of China (PBOC) responded by effectively devaluing the Yuan. So far the “one-off adjustment” has been repeated on three consecutive days.

USDCNY

The Euro appreciated considerably against the US dollar as CNY carry trades are unwound.

EURUSD

Gold broke out of its narrow rectangle between $1080 and $1100 per ounce as investors scuttled to the safety of bullion.

Spot Gold

* Target calculation: 1100 – ( 1200 – 1100 ) = 1000

The Yen displays little net gain or loss.

USDJPY

The Dollar Index does not include China’s Yuan and is falling primarily because of the Euro. The Broad Trade-Weighted Index which includes the Yuan is calculated weekly; so it will take a few days before we can assess the impact.

Dollar Index

Competing devaluations are likely to continue as each state (or trading block) attempts to maintain an export surplus. This is a zero sum game, so each action will inevitably elicit an equivalent response from major trading partners. Currency markets are awash with vast sums of liquid capital and an estimated $9 Trillion in carry trades (where hedge funds borrow in a low-interest-rate currency and invest in another at higher rates). Any beggar-thy-neighbor escalation is likely to destabilize financial markets and the precarious balance may prove difficult to restore.

During the 1997 Asian Financial Crisis George Soros called for international regulation of financial markets to prevent a reoccurrence.

It is time to recognize that financial markets are inherently unstable. Imposing market discipline means imposing instability, and how much instability can society take? …. To put it bluntly, the choice confronting us is whether we will regulate global financial markets internationally or leave it to each individual state to protect its interests as best it can. The latter course will surely lead to the breakdown of the gigantic circulatory system, which goes under the name of global capitalism.

~ George Soros: The Crisis of Global Capitalism (1998)

More….

IEA: At Least Another Year Before Oil Markets Rebalance | OilPrice.com

Desperate times, desperate acts

Crude fall continues

Let the Global Race to the Bottom Begin | Foreign Policy

Window on Eurasia: Kyiv Must Work to Isolate Moscow Rather than Negotiate with It

Goldman Sachs Doubles Down On Lower-For-Longer Scenario | OilPrice.com

Philip Glass: 100,000 People

July 15, 2015

China’s stock market falling off a cliff: Why, and why care? | Alicia García-Herrero at Bruegel.org

Great insight from Alicia García-Herrero:

….The need for Chinese corporations and banks to avail themselves of fresh equity cannot be underestimated. On the one hand, corporate debt has grown sixfold from 2005 levels. On the other hand, Chinese banks are not only heavily exposed to these corporates, being still their main source of financing, but also to local governments whose huge borrowing from banks is starting to be restructured. To make a long story short, China’s governments needed a bull stock market to transfer part of the cost of cleaning up its corporates’ and banks’ balance sheets from the state to private investors, including foreigners. The PBoC danced to the Government’s tune, easing monetary policy since November last year. This was done through several interest rate cuts and by lowering the liquidity ratio requirements. The problem with all of this liquidity is that it only fueled additional leveraging, including for gambling on the stock market…..

The sudden collapse of the Chinese stock market had two triggers. First, the was a wave of profit taking after the Shanghai benchmark index broke through 5 000 in early June and doubts emerged about further easing from the PBoC. At that very same moment, China’s securities regulator announced measures to cool down the market, which amounted to banning brokerage firms from providing unregulated margin funding to investors. This was more of a shock to the system than one might imagine, as margin financing in China is much larger than in other stock markets.

Japan had zombie banks, looks like China could end up with a zombie stock market.

January 21, 2015

Gold is rising despite a strong Dollar

Gold is strengthening despite falling oil prices and the rising Dollar.

The Dollar Index is advancing toward a long-term target of 100 after breaking resistance at 90 in December.

* Target calculation: 90 + ( 90 – 80 ) = 100

Spot gold is testing resistance at $1300/ounce after breaking through $1250. Expect a rally to test resistance at $1400, but a change in the primary trend is unlikely. Reversal below $1200 would warn of a decline to $1000*.
Gold

* Target calculation: 1200 – ( 1400 – 1200 ) = 1000

The most likely explanation for gold strength is the prospect of significant quantitative easing by the European Central Bank. Mario Draghi has called on the ECB to purchase € 50 billion of securities per month until December 2016 according to Bloomberg. With Japan and China already following the path of monetary expansion, concerns over the potential for a “currency war” are growing.

August 12, 2014

China strengthens but India, Japan face selling pressure

China’s Shanghai Composite Index overcame resistance at 2150/2200 and is headed for a test of 2250. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Breakout above 2250 would confirm a primary up-trend. Reversal below 2150 is unlikely at present, but would warn of another test of primary support at 1990/2000. Stimulatory measures by the PBOC may lift China’s economy in the medium-term, but are likely to prove unsustainable in the long-term.

Shanghai Composite Index

* Target calculation: 2250 + ( 2250 – 2000 ) = 2500

Declining 13-week Twiggs Money Flow on India’s Sensex continues to warn of selling pressure. Breach of support at 25000 would indicate a correction to the primary trendline. A 13-week Twiggs Money Flow trough above zero, however, would suggest another advance. Breakout above 26000 would confirm.

Sensex

* Target calculation: 21000 + ( 21000 – 15000 ) = 27000

Japan’s Nikkei 225 broke support at 15000, but Monday’s recovery warns of a bear trap. Recovery above 15500 would suggest a rally to 16000*. Reversal below 15000, however, would warn of a test of primary support at 14000. Decline of 13-week Twiggs Money Flow below zero would strengthen the signal.

Nikkei 225

* Target calculation: 15000 + ( 15000 – 14000 ) = 16000

August 6, 2014

Asian tigers and the PBOC

Asian stock markets are lifting on the prospect of increased trade with mainland China. Hong Kong’s Hang Seng Index broke long-term resistance at 24000, signaling a primary advance. But first expect retracement to test the new support level. Respect of 24000 would confirm the target of 27000*. A 13-week Twiggs Money Flow trough at zero indicates long-term buying pressure. Reversal below 24000 is unlikely, but would warn of a correction to the rising trendline.

Hang Seng Index

* Long-term target calculation: 24000 + ( 24000 – 21000 ) = 27000

Singapore’s Straits Times Index is also retracing after breaking resistance at 3300. Follow-through above 3400 would confirm the target of 3600*. Recovery of 13-week Twiggs Momentum above zero suggests a primary up-trend. Reversal below 3200 is unlikely, but would warn of another test of primary support at 3000.

Straits Times Index

* Target calculation: 3300 + ( 3300 – 3000 ) = 3600

China’s Shanghai Composite Index signals a primary up-trend after breaking resistance at 2150/2180, but I would wait for confirmation from a follow-through above resistance at 2250. The PBOC is aggressively injecting liquidity to revive a flagging economy. It may succeed in lifting the economy in the medium-term, but is not sustainable in the long-term and could well aggravate the situation. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Breakout above 2250 would confirm a primary up-trend. Reversal below 2150 is unlikely at present, but would warn of another test of primary support at 1990/2000.

Shanghai Composite Index

* Target calculation: 2000 – ( 2150 – 2000 ) = 1850

India’s Sensex retraced to support at 25500, but is again testing resistance at 26000. Breakout would signal an advance to 27000*. Bearish divergence on 13-week Twiggs Money Flow indicates long-term selling pressure, but respect of the zero line (recovery above 10%) would suggest that buyers have taken control. Breach of 25000 is unlikely, but would warn of a correction to the primary trendline.

Sensex

* Target calculation: 21000 + ( 21000 – 15000 ) = 27000

Japan’s Nikkei 225 is retreating after a false break of resistance at 15500. Expect a test of support at 15000. Narrow consolidation normally ends in continuation of the trend; upward breakout would indicate a rally to 16000*. Declining 13-week Twiggs Money Flow, however, indicates medium-term selling pressure. Reversal below 15000 would warn of a test of primary support at 14000.

Nikkei 225

* Target calculation: 15000 + ( 15000 – 14000 ) = 16000

July 21, 2014

Sleeping tigers: Hang Seng and Straits Times threaten breakout

A monthly chart shows Hong Kong’s Hang Seng Index headed for a test of long-term resistance at 24000. A 13-week Twiggs Money Flow trough at zero indicates long-term buying pressure. Breakout above 24000 would signal a primary advance with a medium-term target of 27000*. Reversal below 21000 and the rising trendline is unlikely, but would warn of reversal to a primary down-trend.

Hang Seng Index

* Long-term target calculation: 24000 + ( 24000 – 21000 ) = 27000

Singapore’s Straits Times Index is testing resistance at 3300. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Breakout above 3300 would signal a primary advance to 3600*. Respect of resistance is less likely, but reversal below 3200 would warn of another test of primary support at 3000.

Straits Times Index

* Target calculation: 3300 + ( 3300 – 3000 ) = 3600

China’s Shanghai Composite Index remains on an upward path after the PBOC lifted bank credit. Rising 13-week Twiggs Money Flow indicates medium-term buying pressure. Follow-through above 2090/2100 would suggest another test of 2150. Failure of primary support at 1990/2000 is unlikely at present, but would warn of a decline to 1850*.

Shanghai Composite Index

* Target calculation: 2000 – ( 2150 – 2000 ) = 1850

India’s Sensex respected support at 25000. Follow-through above 25700 would signal another test of resistance at 26000/26200. Breakout would offer a target of 27000*. Oscillation of 21-day Twiggs Money Flow around zero warns of hesitancy. Reversal below 25000 is less likely, but would warn of a correction to the primary trendline, around 23000.

Sensex

* Target calculation: 21000 + ( 21000 – 15000 ) = 27000

Japan’s Nikkei 225 is finding support at 15000/15200. Declining 21-day Twiggs Money Flow shows medium-term selling pressure typical of a consolidation; respect of zero would suggest another advance. Recovery above 15500 would confirm, offering a target of the December 2013 high at 16300. Reversal below 15000, however, would warn of another test of primary support at 14000.

Nikkei 225

* Target calculation: 15000 + ( 15000 – 14000 ) = 16000

July 15, 2014

China dousing the flames with gasoline

The PBOC is dousing the flames with gasoline, adding further credit to prevent a slow-down. The longer this goes on, the more precarious their situation will become.

China June credit shatters forecast – 1.9 trillion CNY Vs 1.4 trillion CNY in May. Growth now Beijing's top priority. pic.twitter.com/ue2WXL65AH

— Tom Orlik (@TomOrlik) July 15, 2014

Shanghai Composite Index lifted above 2060/2065, indicating continuation of the rally to 2090. Rising 21-day Twiggs Money Flow troughs above zero signal strong medium-term buying pressure. Breakout above 2090/2100 would suggest another test of 2150. Failure of primary support at 1990/2000 is unlikely, but would warn of a decline to 1850*.

Shanghai Composite Index

* Target calculation: 2000 – ( 2150 – 2000 ) = 1850

India’s Sensex retraced to test support at 25000 after reaching its target of 26000. Respect would signal continuation of the advance, but 21-day Twiggs Money Flow below zero warns of selling pressure. Breach of support would warn of a correction to the primary trendline, around 23000.

Sensex

* Target calculation: 21000 + ( 21000 – 16000 ) = 26000

The weekly chart of Japan’s Nikkei 225 (21-day Twiggs Money Flow) shows the index consolidating below 15500. 13-Week Twiggs Money Flow holding above zero signals long-term buying pressure. Breakout above 15500 would test the December 2013 high at 16300. Reversal below 15000 is less likely, but would warn of another test of primary support at 14000.

Nikkei 225

* Target calculation: 15000 + ( 15000 – 14000 ) = 16000