Exchange rate policy in China continues to dominate markets. The yuan has once again been allowed to weaken overnight by another 1.6% at the time of writing, with the offshore contract, which is more freely tradeable, off 7% in the past two day sessions.
The China syndrome
As we have mentioned before, for what was commonly held to be a low volatility currency, the ripples of this CNY move throughout the currency sphere are being felt far and wide.
We are already seeing stage one. Initially we have seen a broad sell-off in riskier assets with the high yielders of AUD and NZD hurting alongside regional counterparts such as the Korean won and the Singaporean dollar. Longer-term, some of this is likely to reverse. Should China follow up this monetary policy easing with a similarly strong fiscal policy response then we would like to be buyers of AUD and NZD.
Likewise, the movements in China are seen to be beneficial to the euro. Firstly, selling euro and buying yuan has been a popular carry trade for a while now as traders borrowed at very low rates, invested in China and made the difference in-between. We have seen some selling out of these trades in the aftermath of the People’s Bank of China announcement. If China continues to sell euros within its reserves, however, then longer term we will be looking at a lower euro and increased currency friction between China and its Asian partners.
Not ‘Currency Wars’…..yet
As it stands at the moment, we are looking at another CNY move tonight of around 1.9% unless the People’s Bank of China steps in to quell the selling.
One thing that I will say is this is not a significant move in the world of ‘currency wars’. As someone posted on Twitter this morning:
“When Japan devalues, it’s due to demographics. When the US does it, it’s to save the world, when China does it it’s a currency war.”
The key is how other regional players react. Overnight, Chinese industrial production has been shown to have slowed once again through July. Growth on the year hit 6.0% in July, lower than the 6.6% expected but broadly in line with the noises coming from last week’s PMI surveys.
UK jobs growth to slow
Away from the rapidly oscillating yuan there is the small matter of UK unemployment. Moving forward from last week’s Bank of England communications, wages and the resumption of labour market strength in my opinion remains the key concern. Slack in the economy is still estimated at 0.5% and a continuation of job market gains will increase wage pressures slowly but surely.
A strong jobs release today will still bring about GBP strength. At the moment, surveys from industry sectors seem to be showing us that job creation is ongoing but that the pace of improvement is starting to slow. This is nothing new; as slack gets taken up then one would hope that a tightening labour market would bring about wage increases. If you are looking for a higher pound then it is a strong wage number that you should be hoping for.