Weak China activity data provides some support for USD

CNY: Weak China activity data & Trump trade war risk in focus

The Chinese renminbi has weakened modestly overnight resulting in USD/CNY rising back above the 7.2600-level. It follows last week’s correction lower when the pair dropped from a high of 7.2764 to a low on Friday of 7.2490. Weakness in the renminbi has also been evident in other Asian currencies at the start of this week. The worst performing Asian currency overnight has been the South Korean won which has declined by around -0.5% against the US dollar. Weakness in the renminbi and other Asian currencies has been triggered by the releases of weaker economic activity data from China. It was revealed overnight that China’s economy slowed more than expected in Q2 (+0.7%Q/Q) following stronger growth in Q1 (+1.5%Q/Q). It was the weakest quarter of growth since Q2 2022. It has resulted in the annual rate of growth slowing to 4.7% in Q2 down from 5.3% in Q1. The slowdown in growth was mainly driven by weakness in consumer spending. The monthly activity data revealed that retail sales growth to 2.0%Y/Y in June down from 3.7%Y/Y in May. At the same time, industrial production slowed more modestly to 5.3%Y/Y in June down from 5.6%Y/Y in May. Property investment remained weak contracting by -10.1% YTD Y/Y. The latest data releases highlights that domestic demand remains frustratingly weak. It will increase pressure on Chinese policymakers to provide more support for growth through looser monetary and fiscal policies. China’s top leadership are gathering this week between 15^th and 18^th July for the Third Plenum. The Communist Party’s  twice-a-decade conclave is expected to consolidate recent policy thinking rather than chart a new course. Market participants’ will be watching closely to see if there is any fresh policy guidance.   

The second reason Asian currencies may have come under some selling pressure at the start of this week is in response to US political developments over the weekend. The probability of Donald Trump winning the Presidential election in November have jumped further following the failed assignation attempt over the weekend. According to PredictIt.com, former President Trump has widened his lead over President Biden in the betting markets. The probability Trump being re-elected has hit a fresh high at 67% compared to only 27% for President Biden. With the probability of Trump returning as President for a second term becoming more and more likely, market participants may start to more fully price in that outcome. For Asian economies the increasing likelihood of further tariffs being placed on China during a second term of Trump as President would be disruptive and encourage domestic currency weakness. The inflationary impact of more trade tariffs and the potential for looser fiscal policy (lower taxes) to remain in place could also put more upward pressure on US yields particularly at the long-end of the curve providing more support for the US dollar.   

ODDS OF 2^ND TRUMP TERM HAVE INCREASED SIGNIFICANTLY

Source: Bloomberg, Macrobond & MUFG GMR

GBP: UK CPI & labour market reports the key highlights this week

The pound has continued to outperform over the past week resulting in cable rising back to within touching distance of the 1.3000-level for the first time in a year. At the same time, EUR/GBP has just fallen to fresh year to date lows overnight at 0.8389. It is the lowest level for EUR/GBP since August 2022. The pound’s upward momentum over the past week has been reinforced over the past week by hawkish comments from BoE Chief Economist Huw Pill which have dampened expectations for the BoE to begin cutting rates as soon as next month. At the same time, the release of latest monthly GDP report revealed that the UK economy continued to rebound more strongly than expected in the 1H of this year. After expanding by a robust +0.7Q/Q in Q1, the UK economy appears on track to expand again by around +0.5%/+0.6%Q/Q in Q2. The UK election result has provided further encouragement to market participants that the outlook for growth in the UK is improving. The large majority for the Labour party has been welcomed as it should lead to a period of greater political stability in the UK in coming years.

The UK rate market still believes it is a close call as whether the BoE will begin to cut rates a soon as next month. There are currently around 13bps of cuts priced in by the August MPC meeting. For a rate cut to be delivered in August, it only requires three of the seven MPC members who voted to keep rates on hold in June to change their mind. We already know that some of them seven members already thought it was a close decision to vote to keep rates on hold in June. For this reason, even if Chief Economist Pill appears unlikely to change his vote next month, it doesn’t not rule out a rate cut, and he could find himself in the minority next month. The week ahead could prove important in determining if sufficient MPC members will have enough confidence to vote for cut next month. The releases of the UK CPI report for June on Wednesday and labour market report on Thursday are the two main risks for the pound this week. The BoE will want to see further evidence of slowing services inflation and/or labour market weakness to begin to cut rates in August. In our latest FX Weekly report, we recommended a new long GBP/SEK trade idea to take advantage of the pound’s current upward momentum (click here). 

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
EC	10:00	Industrial Production (MoM)	May	-0.9%	-0.1%	!!
EC	11:00	Eurogroup Meetings	--	--	--	!!
US	13:30	NY Empire State Manufacturing Index	Jul	-5.50	-6.00	!!
CA	13:30	Manufacturing Sales (MoM)	May	0.3%	1.1%	!
CA	15:30	BoC Business Outlook Survey	--	--	--	!!
US	17:30	Fed Chair Powell Speaks	--	--	--	!!!
US	21:35	FOMC Member Daly Speaks	--	--	--	!!

Source: Bloomberg