North Asian currencies keep strengthening

Strong Chinese data boosts yuan

The Chinese yuan, Korean won, and Japanese yen continued to strengthen overnight, but elsewhere in the major currency space, the session was non-descript. The dollar index was finishing unchanged at 93.07 as the G-10 currencies continued to range ahead of tonight’s FOMC decision.

The PBOC set another strong fixing this morning for USD/CNY at 6.7825, the lowest since early May, as the CNY continues to ride the wave of robust China data. USD/CNY is trading at 6.7680 this morning, and baring a surprise from the FOMC, should continue its march towards 6.7000 in the coming days.

On Tuesday, China posted solid August data over a wide range of economic sectors. The decline in Fixed Asset Investment eased for a sixth successive month, with a small drop of 0.3%, up from -1.6% in July. Industrial Production accelerated to 5.6%, up from 4.8% beforehand. This marked the strongest reading since December. Retail Sales, the primary gauge of consumer spending, broke a nasty streak of six straight declines, with a small gain of 0.5%. Finally, the Unemployment Rate dipped to 3.6%, down from 3.7%. This was the lowest figure we have seen since December. The strong numbers are a further indication that the Chinese economy is well on the road to recovery.

The Korean won is coat-tailing the yuan, with its healthy beta to the Chinese economy. USD/KRW has broken support at 1180.00, trading at 1178.00 this morning. Assuming the yuan stays firm, the won should also strengthen, targeting the 1150.00 level potentially in the coming week. However, the Bank of Korea is unlikely to be happy to see the won appreciate past that point in the near-term.

USD/JPY fell again overnight, drifting 0.30% lower to 105.30. The yen has strengthened ahead of an expectedly very dovish FOMC outlook tonight maintaining narrow rate differentials. USD/JPY is now within sight of monthly support at 105.00. A break of that region sets up further yen strength, with USD/JPY targeting the 105.50 to 104.00 zone initially.

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