OREANDA-NEWS. During the first week of July, the Yuan continued its 3rd consecutive week of depreciation. Despite posting a slightly better than expected figure for year-on-year Q2 GDP growth (6.7% actual against 6.6% forecast) on Friday, 15th of July, the onshore USD/CNY spot broke the key resistance level of 6.70 on Monday, 18th July for the first time since November 2010. This psychological breach was promptly defended and both the onshore and offshore spot Yuan rates were kept below 6.70 for the remainder of last week.

Initially when the reference rate of USD/CNY was guided stronger by PBOC on 19 July, the spread between the onshore-offshore rates widened to 142 pips. However, with continued strengthening of Yuan as per PBOC guidance over the next three days, the spread between onshore and offshore Yuan rates stabilised and narrowed to 18 pips on Friday.

The Yuan has depreciated more than 3.5% against the US dollar since March this year despite the Chinese government reiterating its desire to keep the Yuan value stable. Facing the slowest annual growth in GDP in more than 2 decades, China faces a dilemma in seeking to gradually weaken the Yuan to increase export competitiveness while also attempting to slow the outflow of capital and reforming the economy. 

Figure 1: Daily Price of SGX USDCNH Front Month Contract (YTD)

Amid weak data, bright spots among services suggests China’s transition still on track

Having already witnessed a significant devaluation during the previous month as a result of the UK’s vote to leave the European Union, many investors remain wary over the potential of a further weakening of the Yuan as outlook for exports and manufacturing data remain weak. Year-on-year, export data for China has remained in negative territory for the 3rd consecutive month, having fallen 4.8% for the month of June while the Caixin China Manufacturing PMI came out at 48.6, lower than the mean estimate of 22 analysts complied by Bloomberg.  This is the 16th consecutive months the figure has come in below 50. Readings below 50 indicate a contraction on a monthly basis.

Despite an overall risk-off sentiment in the market, there remain some bright spots in the Chinese economy.  The services sector has continued hiring as China continues to count on it driving up consumption and supporting a transition away from reliance on manufacturing and exports. The figures for Caixin China PMI Services for the month of June continued to be strong, coming in at 52.7 from that of 51.2 in May. The strength from the services sector has continued to keep the Caixin/Markit composite PMI covering both manufacturing and service above 50 at 50.3. This suggests that despite the weak manufacturing and export data, growth remains positive and that China’s economic transition is still on track. 

Figure 2: Daily Price of SGX USDCNH Aug 16 Futures Contract

Trading of SGX USDCNH remains robust despite uncertainty in the market

In times of volatility and uncertainty, the SGX USD/CNH futures remain a popular venue for hedgers and investors to manage their risks. During the turbulent months of June and July for FX trading, trading of the SGX USD/CNH futures remained robust with competitive bid-ask spread across different tenors, allowing investors to express their price views and effectively manage their risk.