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Forex Flash: Chinese data comes into focus - BBH

FXstreet.com (Barcelona) - Brown Brothers Harriman analysts note that the China data deluge for April starts this week, with trade next up on either Tuesday or Wednesday.

They see that export growth is seen easing to 9% y/y from 10% y/y while import growth is seen slowing from 14.1% y/y to 13% y/y. CPI and PPI are due out on Thursday, with the former seen rising to 2.3% y/y from 2.1% y/y in March but the latter easing to -2.3% y/y from -1.9% y/y in March. New loans could come out near the end of this week, expected at CNY767.5 bln vs. CNY1.06 trln in March.

They comment that weak China data continues to be reported and April HSBC services PMI was reported earlier today at 51.1 vs. 54.3. They write, “Last week, official manufacturing April PMI was reported at 50.6 vs. consensus 50.7 and 50.9 actual in March, while HSBC final manufacturing April PMI was reported at 50.4 vs. 50.5 consensus and 51.6 final in March. We continue to believe that China growth will stabilize around the 8% level, but the risks are tilted more towards 7.5-8.0% than 8.0-8.5%. A slowdown below 7.5% would probably lead to another round of stimulus by China.”

Further, they note that the Chinese yuan posted its biggest decline of the year today. They think the recent bout of excessive yuan strength is over for now and note that over the weekend, the State Administration of Foreign Exchange (SAFE) announced new regulators that will curb the banking system's ability to short the US dollar (or other currencies, for that matter). They write, “Specifically, the quota for individual banks to short foreign currencies linked to their currency loan and deposit situation will be strictly enforced. Banks are given until the end of next month to comply. Previously, SAFE simply set the quotas. Essentially, the Chinese banking system is seen as having more foreign currency loans (short) than deposits (long).” They see that this would imply a need by local banks to buy foreign currencies, especially the dollar. The dollar has fallen 1.5% against the yuan since late February, a pace that we viewed as unsustainable. This policy shift from SAFE likely signals the end to the recent move that has seen the dollar drop to 19-year lows against the yuan.

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