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China’s “No Bears Allowed” FX Policy Still In Spotlight Overnight

Ok, so the overnight fireworks were largely confined to early Asian trading.

As noted last night, the PBoC set the yuan fix stronger (again) which triggered an immediate reversal in the offshore spot which had been drifting lower, giving back a little bit of Wednesday’s 1.2% gain, which saw USDCNH hit a a seven-month low.

Once the fix was in, the offshore yuan rallied and the onshore spot added to Wednesday’s advance, bringing its four-day gain to the most in nearly a dozen years. Ultimately the offshore yuan would retrace a bit, but you get the idea. Clearly, the PBoC is going to be running this show for the foreseeable future.


So with the yuan held hostage, it was left to the aussie to price in the disappointing Caixin print (that’s the sorta not goal seeked one):

  • Caixin China May Manufacturing PMI 49.6; Est. 50.1

“China’s Caixin manufacturing PMI fell to 49.6 in May, the lowest level since June 2016,” Goldman notes, adding that “most of the sub-indexes were lower: the production index moderated to 50.2 from 51.0 in April, and the new orders index went down to 50.3 in May vs. 50.9 in April (The export new orders index also fell to 50.2 from 50.8 in April.)”


And so, that overshadowed strong Australian retail sales (+1.0% m/m in April vs est. +0.3%). “AUD/USD had only just begun lifting option related offers above 0.7450 on strong local retail sales data when heavy macro selling came through in response to weak China PMI data for May,” one Asia-based trader told Bloomberg.


Meanwhile, the yen dropped for first time in five sessions on dollar demand tied to what I guess where supposed to be “hawkish” comments from John Williams. Here’s the Williams recap:

  • It makes sense for Fed to gradually step back from monetary stimulus
  • 3 rate increases by Fed this year is reasonable view, but there is potential for upside for the economy; 3 rate increases is the base, but if economy strengthens, 4 times would be appropriate
  • The next big step for Fed will be to bring down the size of balance sheet; with the economy improving, the process of bringing down the size of balance sheet expected to start later this year, and it will take several years to take it back to normal levels
  • In responding to a question on where he expects U.S. rates to be in the next couple years, Williams says: “In the end we’re only moving gradually and to a relatively low level, 3% or less.”
  • In responding to a question about recent weak U.S. inflation data, Williams says he is not worried that much because he thinks it reflects temporary factors that pushed inflation down

Of course he also said this: “unconventional policies will become the norm.” But I guess we’re not going to focus on that today.

“There seems to be demand at 110 levels but the rebound lacks strength with the 10-year Treasury yield hovering around 2.2% amid mixed U.S. data,” Jun Kato a senior fund manager at Shinkin Asset Management Co. in Tokyo said, adding that although “expectations for the Fed to raise rates at its June 13-14 meeting make it psychologically hard to aggressively sell dollars, with Kushner in spotlight, if Trump can’t cover the issue and if further uncertainty grows, concerns about U.S. politics will prevail over what is already fading expectation for his fiscal and tax policies, pushing USD/JPY towards 110.”

As for gold, shiny doorstops traded near five week highs after the Caixin print slid into contraction territory, and as Dallas President Robert Kaplan said he’s “concerned” about the recent decline in core inflation.


We also got final European PMIs which largely confirmed the flash readings that showed activity at six-year highs. “The euro-zone upturn is developing deeper roots as factories enjoy a spring growth spurt,” Chris Williamson, chief business economist at IHS Markit said. “Increasing numbers of companies are moving away from a focus on cost-cutting toward investing in expansion, underscoring the elevated levels of business optimism seen across the region.”

Oh, and people are still pretty concerned about the UK, with elections just a week away.

Here’s a quick snapshot of global equities:

  • Nikkei up 1.1% to 19,860.03
  • Topix up 1.1% to 1,586.14
  • Hang Seng Index up 0.6% to 25,809.22
  • Shanghai Composite down 0.5% to 3,102.62
  • Sensex up 0.06% to 31,162.95
  • Australia S&P/ASX 200 up 0.2% to 5,738.13
  • Kospi down 0.1% to 2,344.61
  • FTSE 7548.95 29.00 0.39%
  • DAX 12660.54 45.48 0.36%
  • CAC 5321.95 38.32 0.73%
  • IBEX 35 10850.40 -29.60 -0.27%

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