Global FX – Chinese Data, Asian Currencies and GBP
Except the official Chinese manufacturing PMI (50.4 vs. 49.8 expected), most other relevant Asian manufacturing PMI were in retreat (the Philippines at 55.3, Malaysia at 47.4). Moreover, China’s Caixin PMI reading moved back from 50.6 to 50, suggesting that the private manufacturing sector has moved back towards stagnation. China’s manufacturing sector should benefit from the 6.7% RMB depreciation witnessed since November. So far, the supportive effect coming via China’s improved competitive position has been lack lustre. On the other hand, South Korea (48.6 after 50.1) and other local trading partners of China showed weak PMI readings, indicating that higher local FX valuation has taken its toll. Korea’s and Thailand’s August CPI undershooting expectations supports our view that the region is challenged by substantial deflationary pressures. Sharp FX appreciations seen since January (USDKRW: – 12%) have undermined inflation further. However, the main origin of these deflationary pressures is due to under utilised capacity and overleveraged balance sheets.
USD tends to rise when global manufacturing activity weakens. Yesterday the Chicago PMI fell sharply, not boding well for the national ISM release later today. Due to global trade reaching 60% of global GDP, manufacturing trends have become highly synchronised. The US economy, being less exposed to manufacturing compared to AXJ economies, for example, may withstand these pressures better, explaining why USD tends to do better when there is global manufacturing weakness.
Asian FX trading experienced a rare observation this morning, namely what appeared to be synchronised offshore USD buying against low-yielding AXJ on an NDF basis. Over recent months the low-yielding AXJ currencies benefited from fixed income-related inflows slowly converting into equity flows. This dynamic saw its foundation in the region potentially increasing its aggregate savings as it consolidates overextended balance sheets, inspired by increasingly low local investment returns. Local savings moving into local fixed income has been accompanied by foreign funds joining the fixed income rally, looking for capital gains. The consequent sharp decline in local bond yields allowed local equity markets to reach new valuation levels.
By now Asian yield curves have flattened, reducing the attractiveness of this ‘fixed income trade’. Foreign inflows should ease from here, which itself should weaken the local currency outlook. The release of disappointing inflation data suggests local central banks will consider their current monetary and FX approaches. Especially against its main trading partners, which are China and the US, AXJhas run too strong currencies. The region may have a common interest to weaken its currencies, not only to provide support for ailing manufacturing sectors, but also to stop falling import prices undermining domestic prices further from here.
Japan falls into a similar category. Overnight saw another string of weak data releases.2Q capital spending rose by only 3.1%Y, undershooting the 5.5%Y expectation massively. Company sales fell by 3.5%Y and profits declined by 10%Y in 2Q. Its manufacturing PMI eased from 49.6 to 49.5, remaining in contractionary territory. These data may heat up speculation about the BoJ turning towards more aggressive monetary policy tools when it meets on September 21. We reiterate our call for USDJPY to break higher towards 107/108, seeing the best trading opportunity in running long GBPJPY, targeting 145.