PBoC strikes again by de­valu­ing Yuan, UK data ahead

Financial Mirror (Cyprus) - - FRONT PAGE -

The sec­ond trad­ing day of the week com­menced with an un­ex­pected sur­prise af­ter the Peo­ple’s Bank of China (PBoC) shocked the mar­kets overnight by de­valu­ing the Yuan in a move that has blasted the USDCNY from 6.21 to 6.37 in just a few hours. China has acted swiftly to de­value the cur­rency in another at­tempt to rein­vig­o­rate its de­clin­ing eco­nomic mo­men­tum, which is high­lighted by con­tin­u­ally weaker eco­nomic data be­ing an­nounced on a fre­quent ba­sis. The ex­port fig­ures out of China over the week­end were even worse than ex­pected, and it is quite clear that this move has been made to in­spire stronger ex­port com­petive­ness.

It was al­ready well-known that the econ­omy was suf­fer­ing from de­clin­ing in­fla­tion and re­duced do­mes­tic mo­men­tum, but the ex­port num­bers high­lighted that there is slow­ing de­mand for Chi­nese goods and that the econ­omy is also ex­posed to weak­ness out­side of main­land China. This would have alarmed both the PBoC and Bei­jing gov­ern­ment be­cause GDP was al­ready ap­pear­ing vul­ner­a­ble to fall­ing be­low the 7% gov­ern­ment tar­get be­fore the end of the year, with de­clin­ing ex­ports show­ing that the down­side pres­sures on the econ­omy are in­ten­si­fy­ing. Make no mis­take, this 7% GDP tar­get is ab­so­lutely crit­i­cal, and both the PBoC and the Bei­jing gov­ern­ment will do what­ever it takes to de­fend this bench­mark tar­get.

For those won­der­ing if this move is go­ing to be suc­cess­ful when it comes to rein­vig­o­rat­ing the econ­omy, it is far too early to tell but the move to de­value the Yuan shows that China will adapt in­no­va­tive mea­sures to rein­vig­o­rate its econ­omy. Due to eco­nomic weak­ness else­where be­ing a con­trib­u­tor be­hind the weaker ex­port num­bers, and the cor­re­la­tion be­ing strong that these economies have also seen their cur­rency weaken, China might need to de­value its cur­rency even fur­ther if this move does not im­prove eco­nomic data. Ei­ther way, with stag­nant in­fla­tion and eco­nomic data con­sis­tently sug­gest­ing that the China econ­omy is en­ter­ing a deeper down­turn than what was pre­vi­ously ex­pected, we need to pre­pare our­selves to wake up to more sim­i­lar head­lines re­gard­ing China through­out the sec­ond half of this year.

Else­where, the GBPUSD has bounced sharply away from its monthly low at 1.5424 and re­bounded to­wards 1.5605. The GBPUSD bulls are at­tempt­ing to re­cover mo­men­tum and re­gain con­trol of the pair af­ter it en­coun­tered heavy selling pres­sures late last week. Although in­vestor sen­ti­ment to­wards the Pound took quite the hit af­ter the Bank of Eng­land (BoE) out­lined re­turn­ing con­cerns over cur­rency ap­pre­ci­a­tion and in­fla­tion risks fol­low­ing the re­sumed selling in com­modi­ties, there is still some po­ten­tial for the GBPUSD to con­tinue ad­vanc­ing. In­vestors will be look­ing ahead to Wed­nes­day’s UK job­less claims data and op­ti­misti­cally hop­ing that the con­sis­tently strong UK eco­nomic out­look raises sen­ti­ment to­wards the Pound once again, but it will re­quire an im­pres­sive piece of data to send the pair any higher than 1.56.

What would re­ally en­cour­age the GBPUSD bulls to charge for­ward is if the jobs re­port shows fur­ther im­prove­ment in wage growth be­cause this would en­hance ex­pec­ta­tions that the ex­tra dis­pos­able in­come can be fil­tered through the UK econ­omy and im­prove in­fla­tion ex­pec­ta­tions. Ul­ti­mately, it is the alarm­ingly weak in­fla­tion read­ings that are con­tin­u­ing to haunt in­vestor at­trac­tion to­wards the Pound be­cause if in­fla­tion read­ings didn’t take such a nose­dive fol­low­ing the dra­matic tum­ble in com­mod­ity prices, the BoE would have most likely be­gan rais­ing UK in­ter­est rates by now. From an eco­nomic stand­point and mov­ing away from in­fla­tion read­ings, the UK econ­omy is ready for the BoE to be­gin rais­ing in­ter­est rates.

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