China's trade balance explodes

Forex News and Events

China’s imports collapse (by Arnaud Masset)

Last week sluggish PMI figures (manufacturing PMI printed at 49.7 versus 50 in July) warned us that the weak global demand in August, coupled with low commodity prices, would most likely have weighted on China’s export and imports. China’s trade balance was released earlier this morning and data indicate the trade surplus contracted 40% to $60.24bn from $43.03bn in July. Market participants did not expect a change of this scale as they were looking for a figure closer to $48bn. Exports fell 6.1%y/y in August, less than previous month contraction of 8.89%, as a weaker yuan failed to offset a slowing global demand, especially from the US and Europe. However, the surprise came from the imports as it slid 14.3% in August, compared to a drop of 8.6% a month earlier, raising concern about China’s ability to reorganize its economy toward a domestic generated growth.

Beijing need to restore confidence in China’s ability to generate a steady growth over the long-term and more importantly to find a way to revive an anaemic domestic demand. We therefore anticipate that the PBoC will reduce further the reserve requirement ratio to increase the amount of money available for lending.

Still cautiously optimistic on GBP outlook (by Peter Rosenstreich)

In a surprise result the UK BRC retail sales data was significantly worse than expected, as like for like y/y sales dropping -1.0% in August (against 0.9% exp). Ahead of the BoE MPC meeting this negative data could damage the recent GBP demand. Yet while the incoming UK data has been slightly weaker in August, taken within a broader context data has been supportive of the recovery. Tomorrows read of Industrial production, manufacturing production and trade balance will provide further evidence if current softness will be sustained. As for the BoE September MPC meeting we anticipated no changes in policy or voting pattern. The consequence of financial market volatility, weak oil prices and uncertainty of Chinese growth outlook should put the MPC members in a wait-and-see mood. However, we suspect that without the recent spike on volatility other members (specifically Weale or Forbes) would have joined Ian McCafferty in dissenting to favor an interest rate hike. Moving forward, given the recent comments made by Governor Carney in Jackson hole which downplayed concerns over a broader spillover from China we don’t anticipated a prolong delay in hawkishness. Therefore, in the subsequent minutes we do not expected an overly dovish tone which will give the GBP renewed strength. Given the lack of change at the BoE vote we don’t expect much FX volatility on Thursday but continued improvement in GBP positioning. Despite increasing uncertainties we remains cautiously bullish on the GBP. GBPUSD traders should focus on 1.5410 resistance and EURGBP 0.7280 support.

GBPUSD - Lack Of Follow-Through