Chinese yuan drops further

China lowered the CNY’s fixing by 0.18% to 6.1312 per USD today, the biggest cut in the fixing since July 2012 to the weakest level since December 3. The move comes quickly in the wake of the poor trade data over the weekend and in particular the sharp 18.1% drop in exports compared to a year earlier.

Although lunar new year timing may have impacted the data, the drop in exports is still significant and may explain why China has been forcing a weaker currency over recent weeks.

Additionally February inflation data in China was soft, with price pressures recording a broad based decline, with CPI inflation falling to a 13 month low of 2% YoY. The soft inflation data adds further reason for the authorities in China to push for a weaker currency.

USD/CNY and USD/CNH both moving higher in reaction to the data and weaker fixing, with the Chinese currency likely to remain under pressure in the short term both onshore and offshore.

Euro / dollar eyeing 1.40

EURIMM

EUR has continued to push higher over recent weeks and looks well supported as inflows into European assets continues unabated. Although speculative EUR positioning continues to move higher above its 3-month average, suggesting that positioning is becoming a little more stretched, sentiment for the EUR remains firm. The ECB’s decision last week to refrain from any policy easing while not hinting at any easing in the pipeline, suggests that EUR/USD will remain a buy on dips on any decline to support around 1.3775. A test of strong psychological resistance around 1.4000 cannot be ruled out over coming sessions.

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The week ahead

There are plenty of events to chew on over coming days including central bank decisions in Japan tomorrow and New Zealand on Wednesday. The Bank of Japan is unlikely to ease policy further so soon after its actions to boost loan growth while in contrast the RBNZ is set to begin its hiking cycle. On the data front US releases will still be weather impacted to some extent although February retail sales is likely to post a small gain. Moreover, Michigan confidence is set to rise, boosted by higher equity prices.

In Europe, attention will focus on industrial production releases in January, with French and Spanish IP data due to be released today. Overall production is likely to have expanded at a healthy clip of 0.4% MoM in the Eurozone as indicated by survey data. Finally, Australian jobs data is set to show some improvement on Thursday as the pace of deterioration in job market conditions slows.

In Asia the reverberations from the weaker Chinese data will likely impact sentiment across the region. Exports dropped by whopping 18.1% in February while imports rose more strongly than expected at 10.1% yielding a trade deficit of USD 22.99 billion. Central bank decisions in Korea and Thailand are on tap this week. Thailand is a close call, with risks of another policy rate cut but we expect the BoT to stay on hold. Currencies in Asia strengthened last week led by the IDR and INR. Gains this week will be morel limited, especially against the background of higher US yields.

Chinese data casts a shadow over markets

The better than expected reading for January US jobs growth (175k versus 149k consensus) helped to buoy asset markets at the end of the week, with major US equity indices posting gains. The uptick in the US unemployment rate to 6.7% was also not perceived badly as it will put less pressure on the Fed to change its forward guidance. The jobs data helped to overcome concerns over ongoing tensions between the West and Russia over Ukraine.

Consequently the USD strengthened as US yields rose, with the 10 year Treasury yield almost touching 2.82%. The most sensitive currency pair to higher US yields is USD/JPY and further upside traction is likely. The main exception to the USD rebound was the EUR, which continued to benefit from the ECB’s lack of policy easing or dovish commentary at its policy meeting last week.

Chinese data released over the weekend will prove to be less constructive for asset markets at the turn of this week, however, with a surprise trade deficit registered over February and slowing inflation to a 13 month low. Exports dropped by whopping 18.1% in February while imports rose more strongly than expected at 10.1% yielding a trade deficit of USD 22.99 billion.

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