May 16, 2022 02:47 GMT
Offshore yuan extends losses after the release of China's monthly activity data, which miss expectations across the board.
- Industrial output unexpectedly shrank in April, while the contraction in retail sales was deeper than forecast. The unemployment rate rose more than anticipated, while fixed assets ( and property investment growth printed below estimates.
Fig. 1: Citi Economic Surprise Index - China
Source: MNI - Market News/Bloomberg/Citi
- The collapse in China's manufacturing production (-2.9% Y/Y in April vs. median estimate of +0.5% vs. +5.0% in March) bodes ill for other regional EM currencies, as evidenced by the strong co-movement in industrial output growth and ADXY index change over the recent months.
Fig. 1: China Industrial Production Y/Y (%) vs. ADXY Index Y/Y (%)
Source: MNI - Market News/Bloomberg
- Worth pointing out that YtD infrastructure spending growth slowed to +6.80% Y/Y in April from +8.50% prior. This comes as the Economic Information Daily reported that China could issue CNY2tn worth of special government bonds in Q2 to boost infrastructure activity.
- The data reflected the devastating impact of strict COVID-19 countermeasures implemented by Beijing. The picture painted by the report was so bleak that it outweighed headlines on the relaxation of some restrictions/another day of zero community transmission in Shanghai.
- Offshore yuan went offered earlier as the PBOC kept the interest rate applied to its 1-Year MLF operations & net liquidity unchanged, disappointing some dovish market participants.
- The surprise in the yuan fixing was very modest (7 pips) but ended a 9-session run of stronger than expected fixes.
- Spot USD/CNH trades at CNH6.8113, up 115 pips at typing. A rally above Friday's high of CNH6.8380 is needed for the resumption of the uptrend, with Sep 24, 2020 high of CNH6.8462 providing the next layer of resistance. Bears look for a retreat past the round figure of CNH6.7000, a significant resistance-turned-support level.
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