Ok, so you should note that the onshore yuan strengthened past 6.70 for first time since October on Tuesday.
Here’s the chart:
Some folks were a bit confused by that, given that July export and import growth decelerated and missed estimates widely:
But remember what we said just after the numbers hit. To wit:
Generally speaking, the report could obviously have been better, but you have to make sure and view this in the context of the monumental balancing act Beijing is trying to pull off. In that respect, it’s something of a miracle that nothing terrible has happened yet and if what you see there in the yuan is any indication, it certainly doesn’t seem like anyone is taking the news too hard.
Right. And yes, there was a notable reaction in Asian markets after the data hit, but when you think about the yuan, don’t forget these numbers:
- CHINA JAN.-JULY TRADE SURPLUS AGAINST U.S. $142.8B
- CHINA JULY TRADE SURPLUS AGAINST U.S. 172.4B YUAN
- Trade balance: US$46.7bn; consensus: US$45.0 bn in July
It seems pretty clear to me that when it comes to the bilateral rate, people are just staring at that surplus. Have a look at a zoomed out chart of the onshore and offshore yuan:
Basically, between the stabilization of FX reserves, the persistently weak dollar, and the sizable surplus, dollar bears have looked right past that deceleration in export and import growth.
“Market positions were biased to long USD trades [before the trade data] but clients have been selling FX for CNY,” three onshore FX traders told Bloomberg, adding that “gains in CNY vs USD triggered stop-losses, accelerating yuan’s rally.”
So yeah, remember what we said last night?
The yuan is extending gains and that looks to have accelerated as the USD numbers and the rest of the data trickled in.
Anyway, this doesn’t mean you should simply ignore the deceleration in trade growth. Rather, it just means you need to understand the reason for the price action in the yuan rather than just chalking it up to everyone being stupid.
Additionally, it’s still not 100% clear that anyone is panicking about those export/import numbers. It’s all about context and considering what Beijing is trying to pull off in terms of reining in leverage and speculation without derailing the real economy, things could have been far worse.