China: FX reserves continued to deplete, rebalancing weighs on EURUSD and GBPUSD – Lloyds Bank

Research Team at Lloyds Bank, suggests that the FX reserve data for China, released over the weekend, showed a $90bn decline in January after adjusting for valuation effects, reflecting the ongoing challenges to the central bank in maintaining a stable renminbi.

Key Quotes

“In G10, the continued decline of China’s reserves should add to downward pressure on EURUSD and GBPUSD as reserves are rebalanced. Meanwhile, with Chinese markets closed for the week for Lunar New Year, we view that the commodity currencies will re-focus on internal vulnerabilities in Australia and Canada.

With AUD and CAD short positioning having been cut back considerably over the past week, we think both currencies are vulnerable to a rebuilding of near-term easing expectations. RBA Governor Stevens testifies in a parliamentary committee at the end of next week, while this past week’s soft reading on Canadian employment could continue to weigh on the CAD in coming days.”