PBoC sets CNY fixing at 6.7671
The Chinese yuan printed a fresh multi-month low on Friday amid heighten worries about the stability of the Chinese economy and the potential negative effects of the trade war with the US. The offshore rate fell as much as 0.65% with USD/CNH climbing as high as 6.8367. In the onshore market, the yuan were slight more moderate with USD/CNY climbing 0.60% to 6.8149. However, the sell-off was short-lived as both rates returned to the closing prices of the previous day. According to the latest rumours, the yuan’s turnaround could be explained by the sale of a large amount of USD by a Chinese bank.
On a trade-weighted basis, the yuan experienced its worst day since June 19 – when it lost 0.60%. So far, the yuan fell 0.52% after the PBoC set the USD/CNY at 6.7671, the lowest level since July 14, 2017. The persistent weakness in the yuan has spark fears about capital flight similar to what happened through 2015 and 2106 when the Chinese currency fell more than 13% against the greenback.
The trade war initiated by Donald Trump came at the worst possible moment for China as the country started the process to deleverage its economy. Against such a backdrop, further weakness in the yuan against the dollar should be expected.
Japan enters in a new trade deal with EU amid positive economic fundamentals
Opening the door for further trade relationships, the EU – Japan trade deal signed on Tuesday is providing a great message against protectionism. Taking into effect in 2019 and with the purpose of eliminating 99% of total tariffs between both blocs, a sum estimated along EUR 1 billion, the EU just signed its largest trade deal, expected to increase EU exports into Japan by over one third (currently estimated at EUR 86 billion). Japan is the second biggest partner in Asia after China and sixth trading partner worldwide.
Japanese nominal June inflation y/y data published at +0.70%, in line with prior month along with a slight increase in core gauge (ex fresh food) at +0.80% (prior: 0.70%) due to higher oil prices suggest that inflation target of 2% remains far, though recent bounce in June trade balance of JPY 721.4 billion (USD 6.5 billion), confirms heathy growth fundamentals. Common inflation drivers such as wage growth, unemployment rate at historical low and weaker JPY confirm the tendency of an acceleration in inflation for the coming periods, along 1% in 3Q. Accordingly, we expect the BoJ to maintain its dovish stance during 31. July 2018 monetary policy meeting.
Trading at 112.46, the USD/JPY is currently trading neutral. The tendency should however favor a slight increase of the pair along 112.60.
