Awaiting China’s key macro data for July

FX views: Rising US yield and the widening yield differential with Asia pressured most Asian currencies last week, with the Thai baht leading declines, followed by Korean won and Chinese yuan. China’s weak economic data also weighed on the yuan and the rest of regional currencies. In near term, we think yield spreads continue to be the key driver for Asian FXs, and the yuan sentiment driven by China’s key data will also be closely watched.

Week in review: This July, China’s exports contracted more-than-expected by 14.5%yoy, while Taiwan exports beat market consensus but still remained in contraction, and Philippines’ exports rose 0.8%yoy in June following a revised 2.4%yoy rise in May. China’s headline CPI declined 0.3%yoy in July after a 0.0%yoy in June, while Taiwan’s headline CPI inflation accelerated to 1.88%yoy in July from 1.75%yoy in June, and in Thailand, both headline and core CPI rose less than expected in July, by 0.38%yoy and 0.86%yoy respectively.

Central bank monitor: The Reserve Bank of India kept its key repo rate on hold at 6.5%, as we together with all other analysts were expecting. The RBI however imposed a 10% incremental Cash Reserve Requirement (CRR), which could mop up around 0.5% of banking deposits. Post-policy statements suggest that RBI could raise rates if they see signs of inflation pressures generalising across CPI components beyond food prices.

Week ahead: Markets will watch closely for China’s July key economic data, including industrial production, retail sales, fixed asset investment, property investment. Market expects another month of weak data releases. While the authorities’ pro-growth pledges on July 24th are encouraging, the follow-throughs (that turn plans into quantifiable stimulus) are expected to happen, and eventually impact the economic activities. We will also have China’s MLF rate decision, the Philippines’ BSP monetary policy, and CPI data for India.

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US HEADLINE CPI INFLATION TICKED UP SLIGHTLY IN JULY, WHILE CORE CPI INFLATION SLID TO 4.7%YOY

Sources: Bloomberg, MUFG GMR