UBS On-Air: Paul Donovan Daily Audio 'Trading carefully'
The desk interprets the current dynamics of China's export performance, particularly its notable contradiction with US import data, as a potential signal for FX trading strategies. The discrepancy, where China reports a 13.2% market share of US non-energy imports compared to the 8.4% reported by the US, highlights the complexities of trade reporting and suggests that US importers may be strategically managing tariff liabilities to optimize costs. Per the full note from UBS, this situation may lead to continued strength in the CNY as external demand compensates for weaker domestic consumption in China, especially as global trade continues to navigate various geopolitical tensions.
What the desk is arguing
The desk posits that China's ongoing export strength amidst US import data anomalies may provide supportive pressure on the Chinese yuan (CNY). UBS notes that the significant gap between China's and the US's reported trade figures may indicate that US businesses are creatively structuring imports to avoid high tariffs, which in turn helps sustain external demand for China's manufacturing sector.
With China leveraging its manufacturing capabilities, the observed growth could provide further stability for the yuan in the foreign exchange markets. Notably, the data positioning suggests that traders should remain vigilant as external influencing factors, such as trade policies, weigh heavily on market momentum.
Where it sits in our coverage
Our current consensus target for the yuan against the US dollar (CNY/USD) stands at 1.075, with a range spread between 1.04 and 1.12. The following firms contribute to our consensus with Dec-26 targets: - jpmorgan: 1.10 - bofa: 1.04
This analysis presents a bullish stance relative to bofa's more cautious outlook, which sits at the lower end of the observed range. The desk's view aligns with jpmorgan, sitting at the upper bounds of the consensus.
How other firms see it
Certain firms, particularly jpmorgan, echo a bullish perspective on the yuan, suggesting that China's trade strength will support CNY appreciation moving forward. In contrast, bofa expresses skepticism about sustained yuan strength, reflecting broader concerns regarding economic nationalism and global trade tensions.
Traders should also monitor related pairs such as USD/CNY and EUR/CNY, as shifts in US and European monetary policy could further influence market conditions surrounding this narrative.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01China's exports remain robust, partially fueled by re-exporting activities.
- 02Disparity in trade reporting between China and the US suggests potential tariff optimization strategies by US importers.
- 03Economic nationalism in Europe poses risks for external demand dynamics.
- 04Market positioning should reflect the likely continuation of CNY strength in the absence of drastic policy shifts.
Market implications
Watch for the CNY's performance against the USD; should it maintain strength amid ongoing trade discussions, levels around 1.075 could present profitable trading opportunities. Market strategies should also consider potential resistance at higher levels near 1.10 while being prepared for fluctuations influenced by political developments.
Risks to this view
Should trade tensions escalate significantly between China and the US, or if domestic consumption in China takes a more severe downturn, this could jeopardize the stability of the yuan. Additionally, any shifts in US tariff policies impacting imports could lead to recalibration among traders regarding the CNY's valuation.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's six o'clock in the morning London time on Tuesday the 8th of September. Global trade data is the main point of interest today.
China's July export data showed some strength, although part of that is re-exporting imported components, importing chips from the likes of Korea to package up into hardware that is then sold on, for example. Exports to the United States from China remain strong. The gap between what China says it is selling to the United States and what the US says it is buying from China has now reached absurd proportions.
Using China's export figures, China has a market share of over 13.2% of US non-energy imports. The US import data suggests that market share is just 8.4%. The balance of probability is that the data from China is correct, or more correct, and that US importers are being creative in how they import product from China so as to minimise the tariffs that the importers must pay to the US government.
This ability to help customers avoid tariffs allows external demand for China's manufacturing output to compensate for the rather mediocre performance of China's domestic consumer. We also get trade data for July from Germany today. Trade data here is less of a focus.
Domestic demand has been more of a support for German growth, and German manufacturing figures have generally been OK. However, trade tensions with China in particular, and potentially other countries, are a growing risk. Economic nationalism is an increasing force across Europe.
Politicians are tempted down the route of prejudice politics when their local populations become scared about the future. While the election result in Saxony-Anhalt in Germany should not be taken as too strong a national signal, the electoral success of the far right is a signal of the potential for prejudice to take hold. Blaming foreigners is always one of the most convenient scapegoats to present in a prejudicial political climate.
The Bank of England has members speaking before the UK's Parliament today. This is an opportunity to see the wide range of opinions held within the Bank, although the calibre of the questions asked by Members of Parliament is not necessarily always of the highest order, and do not necessarily ask what investors actually care about. The UK's British Retail Consortium's August retail sales data showed positive food sales and negative non-food sales, though these measures do not adjust for inflation effects.
The complication of the UK's series of heat waves has also disrupted consumption patterns, so it's not clear what sort of signal can actually be taken from this. In the United States, we have the release of the New York Fed's One Year Inflation Expectations Index ahead. This will reflect primarily current food and fuel prices, and of course fuel prices have been creeping up recently, with crude oil prices now flirting with $100 a barrel, and refined product prices even more of a problem.
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