Market Close Feb 16

Yuan hits 2-1/2 year high on China inflows 

Yuan hits a 2-1/2 year high on flows, recovery; More weakness seen for US Treasuries; Dollar remains on backfoot

Yuan hits 2-1/2 year high on China inflows 
Oil prices remained relatively high on hopes of a reopening of worldwide economies. Photo: Reuters

(ATF) HONG KONG: Vaccine rollouts and economic recovery expectations drove the reflation trade further in Asia.

Japan’s Nikkei 225 index leapt 1.3%, Australia’s S&P ASX 200 added 0.7% and Hong Kong’s Hang Seng index outperformed, jumping 1.9%. Regionally, the MSCI Asia Pacific index advanced 0.81%.

Bitcoin was trading at $49,323.56 in the Asian afternoon trading session, slightly below its record high of $49,715 hit on Sunday.

“The outlook for the US domestic economy is brightening. The worst of the latest surge in COVID-19 infections is behind us while the rollout of vaccines is gathering pace,” said BCA Research economists in a note. “This improvement is being registered in the counter cyclical DXY (dollar against a basket of currencies), which is once again experiencing downward pressure."

The US dollar weakened against a basket of currencies dipping 0.3% to 90.24, and gold recouped recent losses, rebounding 0.2% to $1,822 per ounce.

US Treasuries extended falls with the 10-year yield climbing 2 basis points to 1.23%.

“With a large fiscal stimulus package looking increasingly probable in the US, and the Fed unlikely to push back on higher inflation expectations, we think the yield of 10-year US Treasuries may rise a little further. We expect this to be driven mainly by higher inflation compensation, rather than higher real yields,” said Thomas Mathews, Markets Economist at Capital Economics. He expects the 10-year US Treasury yield to rise over the next two years, driven by higher inflation compensation. 

Mathews has revised the end-2021 and end-2022 forecasts for the Treasury yield to 1.50% and 1.75%, respectively. This compares with the previous forecasts of 1.0% for both years, and the current level of about 1.15%.

The offshore yuan hit a 2-1/2-year high of 6.4010 per dollar overnight and last stood at 6.4030.

UBS has pencilled more gains for the Chinese currency with a target of 6.2 per dollar.

“Given the highly favourable economic growth backdrop in China, supported by ample monetary policy conditions globally, we forecast double-digit earnings growth and more modest offshore bond default rates,” UBS CIO analysts wrote in a note. 

“Moreover, we anticipated a stronger CNY in trade-weighted terms. Favourable portfolio inflows, both on the equity and bond side, underpin the yuan’s and other assets’ performance,” UBS CIO said in a report

Oil prices remained elevated with Brent crude hovering at a 13-month high after the US cold wave and disrupted crude production.

Still there were sceptics who warned about the overtly optimistic picture being painted by the risk asset rally.

“Bottom line: the only reason to be bearish is…there is no reason to be bearish,” said a BofA Securities global fund manager survey (FMS). “FMS sentiment on global growth at all-time high, V-shaped recovery finally consensus, cash levels at eight-year low, equity and commodity allocations highest since 2011 (the last year both had negative returns), only 13% say it's a bubble.”

Also on Asia Times Financial

Asia Stocks

  • Japan’s Nikkei 225 index leapt 1.28%
  • Australia’s S&P ASX 200 added 0.7% 
  • Hong Kong’s Hang Seng index jumped 1.90%
  • The MSCI Asia Pacific index advanced 0.81%

Stock of the day

HSBC plc shares rose as muchas 7.6% on the Hong Kong stock exchange ahead of a meeting on February 23 to declare the final results for the year ended December 31. Goldman Sachs and BNP Paribas have a buy rating on the shares with a target price of $59 and $57, an upside of 30% and 25% from the current level. 

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