Julius Baer: sobre china y el acero

Redacción - Martes, 14 de Febrero

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ECONOMICS Chinese currency reserves drop again • China’s currency reserves are around critical threshold levels, forcing the Chinese authorities to use a variety of measures to counter yuan weakness.  We expect USD/CNY to be at 7.15 in three months’ time with unforeseen interventions and capital controls going against an aggressively bearish yuan positioning. China’s foreign-exchange reserves fell in January below the symbolic threshold level of USD 3 trillion. Capital outflows continued unabated and may even have increased to USD82.7bn. Nevertheless, we think that the Chinese authorities still have enough ammunition to defend the yuan or at least be able to lean against the depreciation pressure. Currency interventions alone will not be successful, however. To boost investor’s confidence in the longterm, higher interest rates and further signs of stable economic growth would be needed. Given that higher inflation rates and global growth dynamics are kicking in, we expect the Chinese government to be able to deliver on both fronts eventually. In the meantime, we expect the continued tightening of capital controls to raise the barrier to outflows. Slightly higher money market interest rates and unexpected interventions or moments of yuan liquidity stress to punish speculators, who take one-way depreciation bets on the yuan, are also highly likely to occur.

 

For the time being, a constructive sentiment towards China, including positive economic data surprises and encouraging readings of our China risk index, indicates that the muddle-through strategy on the foreign-exchange front seems to work. Furthermore, the Chinese economy continues to show signs of stabilisation as domestic demand grows stronger. The positive growth backdrop creates a fundamental argument against a free fall of the currency.

 

David Kohl, Chief Currency Strategist and Head Economist Germany, Julius Baer

COMMODITIES

 

Iron ore and steel: Lacking a convincing explanation

 

The correction in China’s iron ore and steel futures turned out to be short-lived. The rally resumed with prices up 18% and 12% over the past week, pulling international benchmarks above USD 90 per tonne for the first time since summer 2014. While there is no shortage of possible explanations, none of them is fully convincing. Steel capacity closures in China are the most frequently mentioned one and could indeed be supportive of higher steel prices. That said, a reduction of steel production would result in lower iron ore demand and should lead to falling prices. A second explanation are China’s strong iron ore imports, which set a new record for the month of January and are taken as an indication of strong demand. This is however contrasted by the continued increase in iron ore port inventories. Moreover, imported ore is lower cost than domestic ore and thus should not push prices higher. Last but not least, a third explanation is talk about continued infrastructure spending. The actual impact on steel demand might still be overstated given that the steel intensity of China’s infrastructure has been falling over the past few years. Taking further into consideration the recent doubling of traders’ steel inventory in China, we find it very difficult to explain the price moves. We nevertheless lift our three and twelve-month iron ore price targets to USD 75 and USD 60 per tonne but maintain a cautious view. At the same time acknowledge that price risks remain skewed to the upside, as long as market sentiment remains bullish.

 

The rally in Chinese iron ore and steel prices continued but none of the explanations is fully convincing. For iron ore, a reduction of steel production and increase imports should lead to falling prices. We maintain a cautious view but acknowledge that price risks remain skewed to the upside as long as market sentiment remains bullish.

 

Carsten Menke, Commodities Research Analyst, Julius Baer

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