Global Daily – The limits to yuan weakness

by: Arjen van Dijkhuizen , Bill Diviney

EM FX – Renewed pressure on Chinese yuan – The Chinese yuan (CNY) has extended its depreciation versus the US dollar in recent trading days. The CNY has lost around 8% since its late March peak and 5.5% since mid-June and is now back to the levels seen one year ago. This morning, for the first time since 9 August 2017, the yuan fixing was set beyond 6.70. In our view, the escalating trade conflict with the US is a key factor behind the recent CNY weakness (see our report China-US trade war escalates). On top of this, we have seen more signs that the Chinese economy has resumed a (gradual) slowdown – see our recent report here – and more measures to soften macro-economic policies. It shows the policy dilemma faced by the authorities. Beijing has committed to a more market-oriented exchange rate regime, creating room for market forces to influence the fixing. What is more, Beijing may also use some exchange rate weakening as tool in the current trade war with the US, to correct for the effects of higher import tariffs. On the other hand, we are still of the view that the PBoC will not tolerate too much CNY depreciation versus USD. This was also illustrated by official verbal interventions in early July, after which the CNY showed a temporary recovery. Beijing has learned clear lessons from the 2015-16 wobbles, when one-sided CNY depreciation fears triggered large capital outflows and pressures on FX reserves. All in all, we still find it hard to believe that the Chinese authorities will let the yuan drop in an uncontrolled manner, although in the near-term yuan weakness may still continue. Meanwhile, other EM FX – particularly in Asia but also in other regions – and commodity prices also came under pressure again in the slipstream of this renewed yuan weakening (Arjen van Dijkhuizen)

US Macro: A closer look at the drivers of underwhelming wage growth – In the latest sign of exceptional labour market strength, weekly jobless claims fell to a new 49 year low of 207k today. Against this backdrop, average hourly earnings grew 2.7% yoy in the most recent nonfarm payrolls release – by no means a weak number, but an underwhelming one considering labour market strength elsewhere. What explains the apparent mismatch in labour market indicators? Today we published an in-depth look at this topic (see here), and we find that better anchored inflation expectations, hidden labour market slack, and a lower NAIRU are likely keeping a lid on wage growth. Globalisation and lower trade union membership also seem to have reduced the bargaining power of labour. While we expect wage growth to pick up further, the structural factors holding back wage growth mean that a significant acceleration is unlikely. As such, the risk of the Fed increasing the pace of rate hikes, or going much beyond our forecast of four further 25bp hikes, is low. (Bill Diviney)