Upside risks abound if PBoC buys in Europe

– EUR / USD well supported at 1.2130, with upside risks ahead
– If PBoC buys in Europe to extinguish fires at RMB exchange rates
– Could stock up in EUR, EEC and other local currencies from June 15
– CPI data then rises as ECB doves fly across European skies

Image © Audiovisual Services of the European Commission

• Reference rate EUR / USD at publication:
• Spot: 1.2223
• Bank transfers (indicative guide): 1.1796-1.1880
• Rates of the money transfer specialist (for information only): 1.2114-1.2138
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The Euro-dollar exchange rate levitated nearly three months to open a shortened week on Tuesday, but could improve further over the next few days if Chinese commercial banks reload currencies as they appeared to do on Monday.

The European single currency climbed back above the 1.22 handle in Monday trading, having returned from a support level around 1.2130 before the weekend, and stayed there early Tuesday.

But only after European Central Bank (ECB) Policymakers tried to tamp market expectations for the June policy meeting, where some market participants suggested he might hint at changes to his quantitative easing program.

“The euro stumbled over the weekend as public comments by ECB officials changed market expectations for the outcome,” said Zach Pandl, global co-head of currency strategy at Goldman Sachs.

“Nonetheless, we continue to see strong arguments for an appreciation of the euro over the next 1-2 months. The European medical situation continues to improve, strengthening our confidence in the acceleration of GDP growth throughout the summer, ”adds Pandl.

Above: Euro-Dollar rate displayed at daily intervals on Mondays with the US dollar index.

Pandl and the Goldman Sachs team cite many other factors for their bullish view on the euro, but also have a bearish view on the dollar and, which is half the euro-dollar rate, anticipate a significant rise in the price. the next few months.

The highlight of the Eurozone calendar this week is inflation data for May, where consensus hopes the consumer price index will drop from 1.6% last month to 1.9%, which would be its highest level since November 2018 and close to below the inflation target of 2% ”.

However, the ECB’s chief economist, Philip Lane, said just over a week ago that it still had “a lot of work to do” to achieve the target in a sustainable manner.

The euro-dollar’s good start to the week came despite Ignazio Visco – governor at the Bank of Italy and member of the ECB Governing Council responsible for setting rates – hitting a dovish tone Monday by saying that the prospects for the eurozone recovery are uncertain and that the ECB still intends to continue to counter increases in borrowing costs in the eurozone.

While there are other internal factors that could impact the Euro-dollar rate this week, it is the external factors that may have a greater impact after the People’s Bank of China (PBoC) said monday he would lower the national banks’ foreign exchange reserve rate requirement from 5% to 7% from June 15, which means he ordered commercial banks to buy foreign currency.

“It looks a bit like a retrograde step from the PBoC’s ambitions for exchange rate liberalization. But this is not really the case. Looking at the fixing, which this morning continued to follow the overnight development of the dollar index, it seems that the PBoC still wants to stick to the idea of ​​liberalizing the exchange rate, ”said Iris Pang, Chief Economist of Greater China at ING.

“It’s hard to achieve if the PBoC doesn’t like speculators to sometimes take charge of the direction and pace of the yuan forex market. A market is made up of FX users and investors, including speculators, ”Pang adds.

All of this after the yuan hit multi-year highs against the dollar last week, raising all of its other exchange rates in the process.

Above: USD / CNH alongside the US Dollar Index and EUR / USD.

“The yuan’s sharp reversal this morning to 6.372 from an earlier high of 6.3611 / USD indicates currency intervention by local banks on behalf of the PBoC and could suggest the bank is uncomfortable with it. the speed of appreciation following the breakout below. 6.40 last week. The message is clear, ”says Carole Laulhere, strategist at Societe Generale.

Former PBoC official Songcheng called the yuan ‘overbought’ in an interview with state-run Xinhua News Agency over the weekend. Separately, a PBoC-backed financial news agency also pushed back, saying the yuan’s rapid rise against the dollar is unlikely to last, ”Laulhere adds.

If Chinese commercial banks have to buy currencies from the middle of the month, they might buy the ones that are most relevant to the Chinese economy, and find out which ones they might be; readers need look no further than the renminbi index of China’s currency exchange system (CFETS).

Domestic lenders should buy index currencies in which the euro duplicates the dollar for the most part, and where the component size is based on the relative shares of the overall import-export landscape; it would be difficult for them to do much without buying euros or dollars.

“We believe the announcement sent a signal to the markets that there are enough tools in the central bank’s toolbox to curb expectations of one-way RMB movement, even though the PBoC has exited. ‘direct intervention,’ says Tommy Xie, head of greater China research at OCBC Bank.