Commodities remained firm as US dollar continued its consolidation. Hovering around the narrow range of 102-103.65, the USD index has stayed at its highest levels in more than a decade. In 2017, USD's uptrend is prone to continue as the FOMC is expected to increase interest rates further, while other major central banks would maintain loose monetary policies. What is the most striking following the Christmas holiday is USDCNY's breach of the landmark of 7. This trade was, however, denied by PBOC. The central bank condemned "irresponsible media report" of the selloff of renminbi and confirmed the rate of USDCNY (onshore) remains stable between 6.95 and just below 6.96.
Renminbi is widely expected to weaken further in 2017 so a break of the 7-level would not be a surprise anytime soon. USDCNY has been rising over the past three months and is expected to record about +8% this year. Capital outflow has been a headache in China as investors are concerned about the growth outlook and further depreciation of renminbi. As the State Administration of Foreign Exchange reported, the equivalent of US$33.6B left China via renminbi in November, compared with US$29B in October. PBOC's funds outstanding for foreign exchange plunged -USD55B (RMB383B) to the lowest since 2011 last month.
At the Central Economic Work Conference 2 weeks ago, the government emphasized the need of "risk prevention". In our opinion, the risks that the officials referred to are those in the financial system, including leverages in the housing and bond markets, as well as the depreciation in renminbi. For the latter, the government stressed the need to maintain renminbi's "stability at an equilibrium level".
On the dataflow, US pending home sales surprisingly contracted -2.5% m/m to a seasonally-adjusted 107.3, the lowest level in almost a year, in November. This came in worse than consensus of a +0.6% gain and October's +0.1%. Rising mortgage rate and low inventory discouraged potential buyers. Today, advanced goods trade deficit probably narrowed to US$61.5B in November, from US$61.9B in the prior month. Initial jobless claims might have added +2K to 277K in the week ended December 24.