China’s weaker currency for a stronger economy

(Alexander Kuptsikevich – FxPro Financial Services Limited)

China’s data package released this morning exceeded expectations in countering the worsening market sentiment.

Official data showed a 5.4% y/y rise in retail sales in August compared to the expected 3.8%. The retail sector has benefitted from pent-up demand after a sluggish 2.7% MoM. Industrial production added 4.2% YoY against expectations of 3.8%.

These improvements are mainly attributable to the easing of coronavirus restrictions but may also be a reaction to the stimulus package implemented last month.
The recent economic acceleration may also be linked to the weaker renminbi, which has lost 4.7% against the dollar in less than a month. The USDCNH gained 11.5% from March local lows. In contrast to Europe, where a weak Euro is becoming a brake on the economy, the weaker renminbi may be warmly greeted by the authorities.

China’s consumer and producer prices growth is close to 2.5% y/y, compared with 9% CPI growth in the Eurozone and 8.3% in the USA. The weaker yuan supports Chinese exports’ competitiveness and slightly boosts domestic consumption but has not yet provoked excessive pressure on prices.

Yesterday the Chinese offshore yuan crossed the 7.0 per dollar line and is trading at 7.03 today. A significant psychological level in the past forced the authorities to step in to defend their currency in 2016 and 2018. In 2019 and 2020, the turning points have been higher, close to 7.15. It is well worth being prepared that we will not see any meaningful action or serious verbal interventions by the Chinese or US authorities up to these levels.

Good US is data bad for mood: Stocks, gold and crypto down [Video]

(Ipek Ozkardeskaya – Swissquote Bank Ltd)

US railroad companies and the unions representing their workers reached a tentative agreement early Thursday to prevent a rail strike in the US. Avoiding a rail strike is good news, but not good enough to give a smile to investors. The markets remain too focused on inflation.

The S&P 500 closed the session more than 1% lower, as US retail sales and jobless claims – which both hinted that the US economy remains relatively resilient to the Federal Reserve (Fed) rate hikes – didn’t help keeping the Fed hawks at bay.

The US 2-year yield spiked to 3.90%, the mortgage rates in the US topped 6%, the US dollar consolidated a touch below the 110 level, Ethereum lost 10% and gold dived to $1660 per ounce.

US crude took a good 4% dive. But this time, it wasn’t just the recession talk, it was because the Americans rectified a beginner’s mistake that they have made earlier this week, saying that they will refill their strategic oil reserves if prices fall below $80 per barrel.

We will likely close this week on a sour note. Next on the economic calendar are the final European CPI read, which will confirm that inflation spiked to 9.1% in August, and the University of Michigan Consumer Sentiment, which will hopefully not print a significantly positive number, because the Fed hawks got strong enough the week before the Fed decision.