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12 Aug: China's 5.1% appreciation

| Posted by: Paul Donovan | Tags: Paul Donovan

  • The US and Europe are of roughly equal importance to China as export destinations. The Chinese currency has weakened 3.6% against the US dollar. The Chinese currency has strengthened 5.1% against the Euro. One move attracts headlines, one is ignored. Economists collectively roll their eyes (we do that a lot).
  • What matters economically is whether Chinese exporters pass on the move (increase market share) or not (increase profit share). To put things in context, Chinese economic activity accounts for around 1.6% of the US CPI basket. US labour costs (+2% yoy yesterday) account for around 60% of the US CPI basket.
  • UK labour market data has somewhat heightened interest in the wake of the Bank of England's policy confusion. There has been a steady increase in labour costs this year as the labour market has tightened – earnings data may be a focus. Euro industrial production is less timely, but still of some interest.
  • From the US we have Fed President Dudley speaking. Market volatility can be expected to increase as the Fed moves from forward guidance to data dependency (because data is more volatile than guidance). We believe the data is consistent with a September rate increase – but it is the Fed's interpretation of the data that matters.