Chinese Yuan at the Highest Level Since October 2010. Will it Shift PBOC Policy?

For the past few weeks, things were calm in the Chinese economy, with only a few economic releases. However, this week, we will be waiting for new clues on where the economy is standing.

Moreover, there were some notable moves in equities and the Chinese Yuan, which keep us questioning whether this move will continue or it’s another short-term play.

Fundamentals In Focus

Beginning this Wednesday, we will be focusing on China’s Trade Balance, which will be released at some point during the Asian session. Usually, it is announced around 01:00 GMT+.

The estimates point to a slower surplus of 292B Yuan in July compared to 294B in June of this year, which would be the first decline in surplus after rising for four months in a row.

Exports set to slow down to 10.9%, which would be the first slowing down in three months, but likely to remain the 3^rd highest reading since 2015.

Imports are also expected to ease back for the first time in two months, back to 16.6% down from 17.2%. Yet, this would be the longest increase in YoY Imports since 2010.

On Thursday, all eyes will be on a collection of inflation figures, including Consumer Prices and Producer Prices.

The YoY CPI is expected to remain stable at 1.5%, which would be the third monthly stabilization in a row and the highest reading since January of this year. MoM CPI is expected to post the first monthly increase in two months and the biggest MoM increase since January.

Yet, the PPI is expected to tick higher for the first time in five months up to 5.6% in July compared to 5.5% in June.

Earlier next week, we’ll focus on Industrial Production, Fixed Asset Investment and the YoY Retail Sales on Monday, which likely to have the biggest impact on the markets, especially if the numbers come in with a notable change.

Chinese Yuan At The Highest Level Since October 2010

The Chinese Yuan continued to rise to the highest level since October of the last year, supported by the US Dollar major weakness this year. This comes in addition to some positive economic releases in China over the past few months, which increased the possibility for a change current policy of People’s Bank of China soon.

CNH is now trading around 6.73, trading below the former support area which used to stands around 6.75. With the current retracement of the US Dollar, the Chinese Yuan might show some weakness, but it’s likely to be limited below that former support.

On the upside view, the possibility for another leg lower in USDCNH remains valid, probably toward 6.7 and even 6.6 later this year.

Shanghai Composite Index Possible Breakout

Shanghai Composite Index has been rising for the past eight weeks in a row, posting the longest gaining stake since 2014 despite the fact that volume is notably lower compared to the rest of this year.

In the meantime, Shanghai Composite is trading near a key resistance at 3290, which represents a solid resistance, which held since November of last year.

Each time the index tested this level twice for the past year. One in November of 2016 and in March of this year. However, it failed to break above that resistance and lost almost 290 points.

This would be the third test, which means that the index will either form a triple top formation and/or would be in a breakout mode. A break of which would mean another rally, probably toward 3400.

Otherwise, traders should be ready to experience another nosedive back to 3000 points once again.