With the current escalation in trade tensions between the US and China, tonight’s Chinese trade balance data will take on extra importance.
Last week, President Trump took the market by surprise when he announced a fresh set of 10% tariffs to be applied to a further $300 billion of Chinese goods as of September 1st. China then responded by sharply devaluing the CNH.
USDCNH traded above the 7 level for the first time since the Global Financial Crisis in 2008. The move was then met by the US Treasury dept issuing a statement labeling China as a “currency manipulator”. This is the first time since 1994 that the US has applied such a label to China and was met with fierce opposition from the Chinese.
What are the expectations?
Expectations are for the headline trade balance figure to print $44.23 billion over July. This would be down from the prior $50.98 billion. Such a reading likely reflects the expected downtick in Chinese exports to the US, following the imposition of fresh 25% tariffs in May.
However, there could be room for an upside surprise. This is especially true given that US data reported the US trade deficit with China to have widened to a five-month high over the prior month.
Indeed, recent releases reflect a steady widening of the Chinese trade balance over the last three months. Data has shown a move from $13.69 billion in April to the current $50.98 billion.
So, with all that in mind, what impact could the data have?
If the trade balance data comes in below expectations, the Chinese government will be quite concerned.Levels of trade are being closely watched in light of the escalation of tensions between the US and China.
A weak reading will, therefore, pull into question the resilience of the Chinese economy. Following a sharp devaluation of the yuan, which should translate into better figures going forward, the PBoC is unlikely to react to a weak reading. That being said, it will certainly be a red flag.
A strong reading, on the other hand, might further provoke the ire of President Trump. While the remaining $300 billion of Chinese goods entering the US have now been tariffed at 10%, Trump could still raise this higher. Such a move would take a heavy toll on risk markets.
USDCNH has been back on the ascent today. While still sitting down from the recent 7.1390 highs printed on Monday, price has been trading higher. While above the 7 level, focus remains on further upside – However, given recent developments and the scale of the last move higher, a period of range-bound activity seems reasonable to expect.