All eyes this week will be on economic data from China as the Chinese yuan (CNY) shows signs of hitting a near-term ceiling.
Chinese equities were moving higher on Monday — as were stocks in Japan, Hong Kong and South Korea — after the People’s Bank of China lifted reserve restrictions on currency trading. The result: it is easier for traders to acquire dollars in China, and cheaper to short the yuan. The result was a weaker yuan against the U.S. dollar. See our free post, 3 Experts: After China Yuan Makes A Move, What’s Next?
China’s August inflation data over the weekend was better than expected. Robert Savage, CEO and strategist at Track.com based in New York, notes that China’s August CPI rose of 0.4% compared to July and 1.8% year on year. Food prices moved fractionally lower year on year, but non-food prices rose 2.3% with rises in healthcare and housing. China reports money supply and loan data Monday, and on Thursday, it reports investment, industrial output and retail sales data, followed and export data Friday.
The Australian dollar was near a new high in recent trading, while the yen was weaker. The Hang Seng and the Korea Stock Exchange Kospi index were higher. Over the weekend, North Korea celebrated its anniversary without more missile launches. Savage notes that Germany and the United Kingdom stressed the need for diplomacy to stop North Korea’s nuclear ambitions, while the U.S. targets energy and other sanctions:
“Last week’s relative restraint on the part of North Korea — it tested a hydrogen bomb but decided on National Day not to launch a ICBM to celebrate – will set the tone for regional risks “as both China and Russia push for talks rather than more sanctions, while U.S. and Japan want oil embargoes on the hermit nation to stop Kim from further nuclear threats. Markets will be watching for the next provocation even as Putin seems to be playing a new role in a tired conflict similar to his intervention in Syria 2-years ago …”
Savage expects swings in currencies this month. He concludes:
” … The headwind of a strong currency on emerging markets was clear last week and it is going to be interesting to watch into next week for the G10 as pain from the Japanese yen (JPY) and GBP can hurt even more. Correlations of equities to FX are back in play after a summer off. The correlation of the USD to the S&P 500 maybe the key risk factor to watch for mood swings next week as the market waits for the U.S. Federal Reserve Open Market Committee and elections the week after and has to wait it out looking for news to fill the gaps – perhaps it will be U.S. CPI or industrial production or perhaps it is UK Brexit politics or China retail sales. My money is on surprise issues in communications, as solar flairs over the last week have increased (6 in the last week) with risks to satellites and cell-phones accordingly – not to mention a boom for Iceland and the watching of the Northern Lights.”
Keep an eye on the iShares MSCI South Korea Capped exchange-traded fund (EWY) and the iShares China Large-Cap ETF (FXI). Also watch Prada (1913.HongKong and PRDSY), which slumped nearly 12% after warning its turnaround will remain slow.
Subscribers can read this week’s emerging markets column, 4 China Financial Stocks With Upside.