Aussie faces delayed reaction

Aussie faces delayed reaction

Summary

With falls by China’s yuan preceding what could be an emerging markets currency crisis, reaction to disappointing data from Beijing was surprisingly mild.

Renminbi’s relaxed revival

Onshore renminbi inched higher whilst Beijing and Shanghai/Shenzhen shares fell slightly, somewhat surprising after data showed China’s economy continued to cool. Output growth missed expectations of a 6.3% year-on-year pace, matching June’s 6% rise instead. Fixed-asset investment fell to the lowest since records began in 1996, up just 3%. Retail sales rose 8.8% vs. a 9.1% rise seen after June’s 9% advance. New loans beat, but mostly because Beijing selectively increased availability. All told, moderating growth is likely to keep markets on alert for a deeper slowdown.

PBOC’s pledge

Meanwhile, Beijing will be satisfied with relatively stable market optics. They vindicate the prudent and neutral policy the PBOC reiterated last week. It also said it would not deploy the yuan as a weapon. Still, despite the yuan’s c. 10% fall and Shanghai shares’ c. 25% tumble from 2018 high to low, China hasn’t expended reserves. Nor has it done much to dissuade capital flight. Furthermore, the onshore/offshore fix has frequently been lower than expected (including on Tuesday).

Calm before storm

Meanwhile a fresh 25% import tax on another $16bn in Chinese goods is scheduled next week and the White House is preparing a flood of duties if deemed necessary. In turn, China has imposed or proposed retaliatory tariffs on almost all annual U.S. imports, whilst China’s new re-leveraging efforts may underpin USD/CNY and stoke White House ire further.

Thoughts on yuan and Aussie technical charts

So, profit taking probably helps explain yuan’s mild bounce, particularly as persistent state bank selling was reported on Tuesday as yuan approached ¥6.912. PBOC almost certainly stepped in at that price earlier this month. Intervention there may seem puzzling given it was short of 2016’s ¥6.9868 low. But a chart of USD/CNH (offshore renminbi) alongside Reuters’ trade weighted (TW) CNH gauge (which tracks China’s official CFETS index) shows ¥6.912 coincides with TW renminbi’s lowest prices since August 2014.  This implies dollar/yuan could reach ¥7 with no intervention, so long as TW renminbi holds off 2018’s low. That’s another incentive to resume selling yuan vs. greenback. AUDUSD, the most liquid yuan proxy, has smashed through $0.7324 support to a new 2018 low this week, absorbing EM FX mayhem. With yuan falls set to resume and a high probability of new attacks on ZAR, TRY, and others, the Aussie could struggle to avoid 20- and 27-month bottoms between $0.7156-$0.7143.