Yuan Heads For Best Week In More Than A Decade As China Trade Data Is Resilient

Ok, so China trade data is out for August and it’s important to understand the context, which I’ll briefly run through.

A couple of weaker-than-expected recent fixings (including Friday’s) and concurrent dips notwithstanding, the yuan is riding a truly epic hot streak.

Coming off its best month since revaluation, the onshore yuan closed at 6.4850 on Thursday, the highest level since April 2016:

Meanwhile, the offshore yuan had its best day against the dollar since May yesterday and you’ll recall this comes on the heels of a record-setting stretch that saw USDCNH fall for 14 straight sessions (i.e. a record win streak for the offshore yuan):

There are multiple factors at play here including still decent economic growth (which is holding up in the face of a deleveraging push that many observers assumed would end up choking off growth to the real economy), the perception that the PBoC will not fight back too hard in order to avoid creating market turmoil ahead of the Party Congress, and seemingly successful efforts to curb capital outflows. To that latter point, China’s FX reserves rose for a seventh straight month in August amid the yuan’s best gain in more than 10 years:

As noted above, Friday’s PBoC fix was weaker than expected (read: an attempt to tap the brakes on the FX appreciation).

But given that the central bank has committed to giving the previous day’s price action a greater say in the next day’s fixing (for our purposes here, let’s just try and pretend like the “counter-cyclical adjustment factor” introduced amid the late May/ early June short squeeze didn’t make a mockery of the liberalization push), the reference rate was still set at the strongest level since May 2016. And indeed it wasn’t 10 minutes (give or take) before USDCNH gave back all of the knee-jerk gains on the way to rallying “big league”:

That move came amid a broader selloff in the dollar, which extended losses midway through the overnight session.

Ok, so the reason I put you through all of that is because one of the concerns with excessive yuan strength is that eventually, it will become intolerable in terms of the drag it could end up exerting on the economy.

So far, we haven’t really seen too much of an impact, but what you have to understand is that the stronger currency isn’t the only headwind for the Chinese economy. There’s also the above-mentioned deleveraging effort which, although targeted at the country’s labyrinthine shadow banking complex, is bound to have knock-on effects as credit creation succumbs to tighter conditions.

And with that, here are the August numbers:

• China Aug. Exports Rise 5.5% Y/y in Dollar Terms; Est. 6.0%
• Aug. imports climbed 13.3% y/y; median est. 10.0% rise
• Aug. trade surplus $41.99b; median est. $48.5b surplus
• Trade surplus with U.S. $26.2 billion

So to the extent the yuan even cares about this data anymore, that’s not going to do anything to change the story here. The slowdown in exports isn’t all that surprising and wasn’t that big of a miss anyway, and the resilience of imports makes sense in the context of the rapidly strengthening currency and still buoyant domestic demand.

Meanwhile, you should note that with Friday’s gains, the onshore yuan is on pace for its biggest weekly gain in more than ten years:

“The extremely bearish USD sentiment spilled over to the yuan market, and fixing failed to cool down bullish sentiment,” Ken Cheung, a senior currency strategist at Mizuho Bank in Hong Kong notes, adding that “heading to the weekend, risk-off sentiment due to the foundation day of North Korea also raised safe-haven demand for the yuan.”

Indeed.