Trade war topples yuanBy Arnaud Masset
The Chinese yuan printed a fresh multi-month low on Friday amid worries about the Chinese economy and the trade war with the US. The offshore rate fell as much as 0.65% with USD/CNH climbing as high as 6.8367. The onshore market was more moderate with USD/CNY climbing 0.60% to 6.8149. The sell-off was short-lived as both rates returned to the closing prices of the previous day. Rumours say the turnaround could be explained by the sale of a large amount of USD by a Chinese bank.
On a trade-weighted basis, the yuan experienced its worst day since 19 June when it lost 0.60%. So far, the yuan fell 0.52% after the Peoples’ Bank of China set the USD/CNY at 6.7671, the lowest level since 14 July 2017. Persistent weakness in the yuan is sparking fears of capital flight such as in 2015-2016 when it fell more than 13% against the greenback. The trade war has come at the worst possible moment for China, as the country starts to deleverage its economy. Further weakness of the yuan against the dollar is expected.
Japan’s EU deal with EU amid healthy economyBy Vincent-Frédéric Mivelaz
The EU – Japan trade deal signed on Tuesday is a bulwark against protectionism. Taking effect in 2019 and eliminating 99% of tariffs – estimated at EUR 1 billion – the EU signed its largest trade deal, expected to increase EU exports into Japan by over one third (currently estimated at EUR 86 billion). Japan is the EU’s second biggest partner in Asia after China and sixth worldwide.
Japan’s nominal June inflation published at +0.70% annually, in line with May along with a slight increase in core gauge at 0.80% (prior: 0.70%) due to higher oil prices. The inflation target of 2% remains far away, though a bounce in June’s trade balance of JPY 721.4 billion (USD 6.5 billion), confirms heathy fundamentals. Inflation drivers such as wage growth, low unemployment and weaker JPY are in place, which might push it to 1% in Q3. Trading at 112.46, the USD/JPY is currently trading neutral, with a tendency to increase.
We expect the Bank of Japan to stay dovish at its 31 July monetary policy meeting.