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China data spooks and FX moves Confucius

August 14, 2015

If China’s aim this week was to give markets a roller-coaster ride then it’s safe to say that it succeeded in spades. Weekend data showing Exports -8.3% in July spiked fears about the state of growth in the world’s #2 economy being anything but as rosy as official (and highly questionable) statistics would have us believe. Hot on the heels of already disappointing Manufacturing prints from the prior week and ahead of what was already forecast to be weak Retail Sales and Industrial Production on Wednesday it only went to spook already tetchy markets which demand evidence that China can help sustain global growth. And while markets have become used to viewing bad data as good data, meaning more helpful monetary stimulus on the way from Beijing, the timing and weight of evidence proved just too much when combined with strong UK 100 technicals, sending the index 200pts/3% lower to July rising support 6550, putting paid to the rally from end-July.

China data spooks and FX moves Confucius
As if that wasn’t enough of a spicy start to the week, China’s central bank (the PBOC) thought Tuesday would be the best day to change the way it fixes the reference exchange rate for its Yuan/Renminbi currency. A decision to allow market forces to have more influence and to move from a de-facto USD peg should have been taken positively – liberalisation, window-dressing for IMF consideration as a genuine reserve currency – however, the sharp devaluation that ensued (the currency fell the most in 20yrs to its lowest rate in 4 years) saw markets immediately assume Beijing was panicking, trying to make the most of current USD strength (ahead of a potential September Fed rate rise) to push its own currency lower, making its exports more competitive to try and boost evidently struggling growth.

As the week moves to a close markets are just as concerned about slowing Chinese growth, however, some calm has been restored. Assurances from the PBOC that significant devaluation is not on the agenda and that it will only intervene from herein under circumstances of extreme distortion has gone to assuage fears of a new currency war (countries race to devalue their FX) which would probably curb global growth. Add to this evidence that the new pricing mechanism can work both up and down (the currency fixed higher this morning for the first day in four) and stability after a volatile 3-day period of adjustment suggests markets may simply be guilty of having read too much into the move. Maybe it isn’t all smoke and mirrors. Only mostly.

Mike van Dulken, Head of Research 

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This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.

Accendo Markets considers opinions and information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance. Prepared by Michael van Dulken, Head of Research

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