China's Trade Data On The Soft Side

 | Jul 13, 2016 06:04AM ET

Forex News and Events

Chinese trade data comes in mixed

Chinese trade surplus eased to CNY311.2 billion in June, down from CNY324.8 billion in May in spite of an upside surprise in exports and a further contraction of imports. Exports increased 1.3%y/y in yuan terms in June in reaction to a weakening yuan. Indeed, throughout June the renminbi lost almost 1% against the US dollar with USD/CNY rising from 6.5854 to 6.6480. Similarly, a weaker yuan also means strong pressure on imports, which contracted 2.3%y/y (-1.2% expected and +5.1% previous), as the PBoC seems less reluctant to let the yuan depreciate further.

All in all, the trade reported left little room for enthusiasm as the data exposes the inability of the Chinese economy to take off in spite of both fiscal and monetary stimulus being implemented by the government and the central bank. For now, we expect the PBoC to stand on the sidelines, as further monetary stimulus would only accelerate capital outflow. Consequently, we suspect that the Chinese government will have no choice but to continue supporting its domestic economy against a backdrop of weak external demand.

Is a surprise in store for the Bank of Canada?

There are important central bank rate decisions this week. Before the BoE decision tomorrow, the Bank of Canada will announce, its rate decision this afternoon. Financial markets expect it to remain on hold at 0.50%. The consensus is that the Canadian economy is still adjusting from tumultuous oil prices and that consequently the BoC will wait for further developments in terms of growth before making any change to its monetary policy.

Our perspective is rather more bearish as we believe that the BoC is likely to cut rates from a quarter point in reaction to declining oil prices and Canadian job creation, which was negative in June, as well as in February and April. As a result, downside pressures on inflation should be expected and the BoC may be anticipating such issues. There are also mounting concerns that household debt is growing at too fast a pace and that it will negatively impact retail sales in the near future. In our analysis of Canada’s current situation we have also factored in the Alberta wildfires, the impact of which is still not exactly known but may be severe. Also, the Brexit impact still has to be quantified and qualified but the underlying difficulties faced by banks may soon also spread to Canada. Currency-wise, we are bearish on the loonie and we target the pair to increase again towards 1.35 in the medium-term.

Silver - Monitoring Downtrend Channel.