Good morning,
Chinese yuan strengthens by most since 2005
Thoughts of a continual fall in the value of the Chinese yuan following additional policy stimulus have turned to dust this morning as the yuan strengthened against the USD by the most in a session since the peg was scrapped in 2005.
Obviously a lot of this move is a hangover from the dollar weakness that has presented itself through the past week and USDCNY was very well behaved last week. This snapback was exacerbated by comments from People’s Bank of China Governor Zhou that there was no basis for continued yuan depreciation.
We do have concerns that this is a temporary move, however, and that corporates will use this opportunity to re-establish hedges in short order. China’s export numbers overnight saw a drop in January although the trade surplus expanded to a new record; a facet of very poor imports, a strong indicator that domestic demand remains weak.
The table remains set for a weaker Chinese yuan through the year but the resumption of trading from the Lunar holiday break has altered this somewhat for now.
Asian dawn signals sentiment gains
Elsewhere in Asia we are seeing a run higher in equities that is likely to boost sentiment in risky assets temporarily. Shares in Japan are up over 6% this morning as we once again look upon Japanese data missing expectations and therefore raising the chances of additional stimulatory policy from the Bank of Japan.
Today’s rally is a bit of a false dawn it seems, however, as it is purely the companies that have been hit hardest in the past weeks rallying hard with those with weaker fundamentals not following on. This is normally a pretty good signal that the rally does not have the legs for a sustained period of positivity but in 2016 it has been unwise to rule anything out before the fact.
Sterling focused on the EU
The increased sentiment is allowing sterling to recover from another week of hard graft. David Cameron is coming into the last week of negotiations with the EU, ahead of a possible announcement of the date for the referendum.
Any deal between the UK and the EU is still way off and the discussion has now shifted from how bad a Brexit would be for the UK to how much it would damage the European Union. We are no closer to knowing this unknowable, but we can be assured that the UK’s call for a renegotiation of its relationship with the EU will be followed by similar from France, Germany and others.
In the meantime, GBP will remain a sentiment driven currency although this week’s data calendar includes both inflation, unemployment and retail sales and a decent undercurrent of wage growth and consumer spending will go a long way to slaying some of the fears that the Bank of England may have to cut interest rates further by the end of the year.
The day ahead
It is Presidents Day today in the United States and therefore we can expect a rather slow afternoon’s trade, but before that we are looking for the gains in Asia to extend the short term positive sentiment.
Have a great day.