Yuan Down on 17-yr Low Industrial Production Growth Rate

Yuan Down on 17-yr Low Industrial Production Growth Rate
August 15, 2019

 

The Chinese yuan fell against the greenback yesterday after economic data revealed that industrial production recorded a 17-year low growth rate as trade issues with the US poured cold water on manufacturing activities. Furthermore, retail sales growth declined, mirroring weakness in consumer spending. Analysts anticipate the yuan to remain below the critical level of 7 per dollar in the years to come as Beijing has taken a conscious decision to leave the yuan to decline amidst import duty hikes from the White House. From a low of 7.01628, the USD/CNY pair rallied to a high of 7.05639 in the past 24 hours.

According to the National Bureau of Statistics, in July, industrial output growth declined to 4.8%, from 6.3% in June. Production recorded its slowest growth rate since 2002 and much below the anticipated growth of 6%.

In the same manner, retail sales growth declined to 7.6% in July, from 9.8% a month before. The reported figure represents the weakest growth in the quarter. On an annualized basis, retail sales growth eased to 8.6%.

In the first seven months of 2019, fixed asset investment recorded an annual growth of 5.7% compared with 5.8% rise in the first six months of the year. Economists had anticipated the rate to remain unchanged at 5.8%.

Investment in properties grew 10.6% y-o-y in June to July period, slightly lower than the 10.9% recorded in the first half of 2019. Similarly, the unemployment rate increased to 5.3% in July, from 5.1% in June.

Julian Evans-Pritchard and Martin Lynge Rasmussen, economists at Capital Economics, opined that a weaker yuan could hardly offset the slowdown caused by the tariffs from the US and overall global economic downturn.

The economists expect a further slowdown in economic activity over the coming year as a result. Notably, in Q2 2019, China’s economy grew at the slowest pace in 27 years. The GDP increased 6.2% on y-o-y basis.

After managing to keep the yuan below 7 per dollar since the global financial crisis, Chinese authorities allowed the yuan to break below the psychological level last week.

The relaxation was allowed after President Donald Trump slapped an additional 10% tariff on $300 billion worth Chinese goods. Furthermore, the US designated China as a currency manipulator after the yuan breached 7 per dollar. The US has made this decision for the first time in 25 years.

For the past week, China’s central bank has pegged the yuan’s daily midpoint reference rate above 7 to the dollar, with 2% movement allowed on either side. On Monday, the yuan hit an eleven-year low of 7.0689 per dollar.

Rabobank issued the most pessimistic outlook for the yuan in a survey conducted by Reuters. The Dutch multinational bank anticipates the yuan to hit 7.75, a level unseen since 2007.

Michael Every, senior Asia-Pacific strategist at Rabobank, Hong Kong, explained the reason for such a gloomy outlook on the Chinese currency: “In an environment which is going to be globally far more uncertain where China is growing much more slowly, you have more than a trade war – basically a Cold War between the two. It strikes me that you will end up having a massive depreciation in the renminbi.”

Michael Every has forecast the yuan will fall nearly 20% to 25% i.e., to 8.5 or even more against the US dollar in the next two years. A weak yuan also increases the risk of capital outflows. The weak economic growth forecast and anticipations of additional policy easing by China’s central bank (People’s Bank of China) is anticipated to put further pressure on the yuan.

The facts mentioned above indicate that the yuan will remain weak against the greenback for a considerable period of time.

Technically, the USD/CNY pair has become range-bound between 7.035 and 7.055. The stochastic RSI indicator is rising. As a result, we can expect the currency pair to move up in the short-term.

cny - technical analysis - 15th Aug 2019

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Andrew Wright

Prior to founding tradersasset.com in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.


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