China Macro


Greater China Sales Traders

Monthly Macro Outlook: Reminiscent of 2016

Looking at China’s data, the evolution reminds us a lot of that of 2016 – another year of soft growth and exports. The comparison is interesting as it suggests that the outlook is not as bad as many believe. Retail sales and auto sales are much weaker this time, pointing to weak domestic demand, but industrial production, capacity utilization and confidence indicators are better. Concerning exports, the trend is negative but no worse than in 2016. As was also the case in 2016, the state sector has started to serve as a shock absorber, with state investment growth moving higher to offset the deceleration in private investment. This trend is likely to become clearer as the global macroeconomic outlook remains gloomy.

Caixin May PMI, which tend to focus on SMEs, was out above expansion, at 50.2, whereas the State Manufacturing PMI, which focuses on larger firms, fell to 49.9. This divergence is not unusual between both indicators. Caixin PMI is well-known to be more volatile than State PMI which explains why it attracts less market attention. Looking at the State PMI, which gives a more reliable overview of the state of the Chinese economy, the latest print confirms that headwinds related to trade war are hurting quite strongly the economy, thus opening the door to further stimulus.

On the trade war front, the Chinese white paper published last Sunday (“China’s Position on the China-US Economic and Trade Consultations) could serve as base of negotiations in the upcoming G20 meeting in Osaka at the end of the month. Many observers pointed out that it confirms that the two sides are moving further apart. In our view, the likelihood of trade agreement in the short-term is extremely low. China is in a wait-and-see position which means investors should not have high expectations regarding the G20’s outcome.

Looking at Asian exports, there is no sign of rebound indicating that a V-shaped global recovery in H2 is unlikely to happen. Most of the key countries are experiencing a sharp contraction, excepted for Vietnam. The country’s exports are slightly decelerating but are still well-oriented. Vietnam, which serves as offshore market for Korean firms looking to reduce costs, is the Asian country benefiting the most from trade war. Vietnamese exports to the US are expected to increase further in coming months, reflecting an acceleration of an existing trend that we could have already noticed in 2014 and in 2017.

USDCNH: China-US Trade War Tension Parameter

USDCNH FX pair is the best parameter to gauge the ongoing China-US Trade War tension with its currencies composed of target countries and more market driven compared to USDCNY. Every macro trader should include USDCNH spot onto their watchlist.

During the past Month in May, USDCNH spot first broke out the key 6.7500 range resistance triggered Trump Twitter. Spot then extended rally all the way to near 6.9500 level, which is only several hundred pips below last year’s high. This dramatic move Albeit spot moved near 3% in just few trading days, unlike the previous RMB depreciation in 2016 and 2018 market sentiment overall is stable. There are several factors contributing to the calmness we observe:

  1. Before May, CNH has accumulated meaningful appreciation against USD and other currencies making itself once the best performer in Asia space.
  2. The USDCNY fixing published by PBOC has been moderately configure to the strong RMB side, which is traditionally the initial and cost less tool to manage market expectation.
  3. Increase in Fed rate cut expectation due to poor economic data, US treasury yield itself dropped significantly along spot’s way up and China-US 10-year government bond yield spread widened to 1.2%, which are supportive for CNY/CNH.
  4. Exporters USD selling interest emerged at current level. And many onshore banks advised their corporate clients to do so.

Looking ahead, we don’t see meaningful probability of spot breaking the 7.0000 key big figure handle. Accordingly, a high conviction trade idea could be short call or long put with strike at 7.0000, which is being deployed by many onshore options traders.

Source: Saxo Bank

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