USD continues to trade at weaker levels after confirmation of slower China growth

CNY: Loss of growth momentum in China increases calls for more stimulus

The US dollar has strengthened overnight against the G10 commodity currencies of the Australian and New Zealand dollars. At the same time, the Chinese renminbi has weakened against the US dollar resulting in USD/CNY rising back up to 6.1700 as it rebounds from last week’s low of 6.1194. The main driver has been the release of weaker than expected economic data from China that has provided further evidence that the recovery slowed in Q2. It has been confirmed that GDP expanded by 0.8% Q/Q in Q2 which marked a slowdown from growth of 2.2% Q/Q in Q2. The monthly activity data revealed as well that retail sales slowed more sharply than expected to an annual rate of 3.1% in June down from 12.7% in May. At the same time, there was further evidence of ongoing weakness in the domestic housing market. Property investment contracted again by an annual rate of -7.9% YTD YoY. The one bright spot in the monthly activity data was industrial production which increased by a stronger than expected annual rate of 4.4% in June up from 3.5% in May. The slower pace of recovery keeps pressure on domestic policymakers to provide more stimulus to strengthen economic momentum.   

However, it appears less likely that further stimulus will be forthcoming as soon as this month which increases the risk of growth disappointing again in Q3. The State Council Meeting was held on Friday and mentioned only a vague plan to promote public infrastructure construction in mega cities without providing details. The PBoC also indicated at the end of last week that was room further housing easing but did not put forward any detailed measures. Market attention will now turn to July’s quarterly Politburo meeting scheduled to be held between 28^th and 30^th July. Overall, the combination of slowing cyclical momentum in China combined with the lack of more forceful stimulus measures poses downside risks for Asian, commodity-related and emerging market currencies. So far this year it has been mainly Asian currencies that have been weighed down by the disappointing pace of economic recovery in China. The CNY (-3.8% vs. USD YTD), MYR (-3.4%), TWD (-1.1%) and THB (-0.3%) have underperformed while the IDR (+3.8%), PHP (+2.5%), SGD (+1.3%) and INR (+0.7%) have managed to buck the weakening trend.  

CNY IS DIVERGING FROM OTHER FX MAJORS VS. USD

Source: Bloomberg, Macrobond & MUFG GMR

USD:  Set to remain on weaker footing after heavy sell-off last week 

The US dollar has continued to trade at weaker levels against the other major currencies of the euro, pound, Swiss franc and yen after the dollar index adjusted sharply lower last week to fresh year to date lows. It was the largest weekly decline (-2.3%) for the dollar index in percentage terms since the week ending 11th November of last year (-4.1%). It marked a period when US dollar’s bull run from last year was just starting to reverse. The dollar has continued to sell-off since and the dollar index has now reversed almost three quarters of the move higher recorded between the January and September of last year. It still leaves room for the US dollar to continue correcting lower through the rest of this year. The latest IMM positioning report revealed that Leveraged Funds have built up short USD exposure in recent weeks but the total size of short positions are relatively modest and leaves room for further speculative selling in the near-term. However, one limitation of the report is that it only shows positioning up to the 11th July, and it is likely that short positions will have been increased further last week.

In the week ahead, there are no major US economic data releases or events that are likely to trigger a reversal of the US dollar weakening trend ahead of the Fed’s next policy meeting on 26th July. In our latest FX Weekly report (click here), we recommended continuing to hold on to our long EUR/USD trade idea with the pair breaking into a new higher trading range between 1.1000 and 1.1500. We expect the ECB to deliver another 25bps hike this month and leave the door open to another hike later this year. However, a September hike is far from a done deal in light of continued economic weakness in the euro-zone.  For now though the euro-zone rate market is continuing to price in a high probability of a hike in September (44bps) or November (49bps). The euro’s current bullish trend would only be challenged they those ECB rate hike expectations were questioned more seriously. Furthermore, we highlighted why we expect USD/CAD to fall back below in the 1.3000-level in our latest FX Weekly.

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
IT	09:00	Italian HICP (YoY)	Jun	6.7%	8.0%	!
EC	09:15	ECB President Lagarde Speaks	--	--	--	!!
EC	09:30	ECB's Lane Speaks	--	--	--	!!
US	13:30	NY Empire State Manufacturing Index	Jul	-4.30	6.60	!!

Source: Bloomberg