FX Week Ahead - Top 5 Events: Q2'19 US GDP Report & USD/JPY Rate Forecast

Caixin China PMI Preview:

• The September Caixin China PMI Composite and Services reports are due on Tuesday, October 8 at 1:45 GMT and the data will likely show a slowing Chinese economy thanks to the US-China trade war.

• Meanwhile, the September Markit/HIS China Manufacturing PMI remained below 50, a sign that the sector continues to contract.

• USDCNH has continued to maintain its elevation above the crucial 7.0000 exchange rate, and a further escalation in the US-China trade war could push USDCNH up towards 7.3000.

Join me on Mondays at 7:30 EDT/11:30 GMT for the FX Week Ahead webinar, where we discuss top event risk over the coming days and strategies for trading FX markets around the events listed below.

10/08 TUESDAY | 01:45 GMT | CNY Caixin China PMI Composite and Services (SEP)

After data last week showed the US trade deficit at record – further enflaming US President Donald Trump – upcoming data on the other side of the Pacific Ocean will show that the US-China trade war is having its own disappointing impact. The upcoming September Caixin China PMI reports are due to show that the Chinese economy continues to remain at a slower pace of growth that what has typically been experienced in recent years.

According to a Bloomberg News survey, the China PMI Composite is due in at 51.6, unchanged from the prior month, while the China PMI Services is due in at 52.0 from 52.1. The September Caixin China PMI Manufacturing report, released last week, came in at 51.4 versus 50.2 expected, from 50.4.

Other PMI readings have produced a mixed bag as well. The September Markit/IHS China Composite PMIcame in at 53.1 from 53 in August, the Manufacturing PMI came in at 49.8 from 49.5, and the Non-Manufacturing/Services PMI came in at 53.7 from 53.8.

American and Chinese officials are meeting this week in Washington, D.C. in order to try and come to terms on a trade deal. Low-level officials are meeting each of the next two days, while high-level talks will begin on Thursday. The Trump administration confirmed that US Trade Representative Robert Lighthizer and US Treasury Secretary Steve Mnuchin would be in attendance alongside Chinese Vice Premier Liu He.

The persistent threat of escalation in the US-China trade war directly threatens USDCNH insofar as Chinese officials have been using the Chinese Yuan as a policy tool. It still holds that US President Trump may step up

If Trump steps up the latest round of tariffs from 10% to 25%, the Chinese Yuan will require another 3% depreciation from its close on Friday, August 2 to offset the increased tariffs; total depreciation needed by the Chinese Yuan to fully offset the 25% tariffs on $300 billion of goods is 5% from where it closed on Thursday/opened on [Friday, August 2].

As such, USDCNH should hit at least 7.3022 if US President Trump escalates the trade war further by increasing the tariff to 25% on $300 billion of Chinese goods.