China’s currency hits 16-month high on retail spending boost

China’s currency hit its highest level in more than a year as retail sales rose for the first time in 2020, underscoring the country’s economic recovery from the coronavirus pandemic.

The onshore-traded renminbi strengthened as much as 0.4 per cent to Rmb6.7857 per US dollar on Tuesday, its firmest level since May 2019. That coincided with official data that showed retail spending increased 0.5 per cent in August compared to a year ago. The less tightly regulated offshore-traded renminbi strengthened 0.3 per cent, past Rmb6.8 per dollar.

Ken Cheung, a strategist at Mizuho Bank, said the renminbi had also been boosted by hopes of improved relations between Beijing and Washington following signs of a deal on the future of popular Chinese app TikTok.

“As worries about China-US tensions took the back seat briefly, investors shifted their focus to strong China fundamentals,” Mr Cheung said of the improvement in retail sales. He thinks the onshore-traded renminbi could rise further to Rmb6.75 per dollar.

Meanwhile, China’s central bank “has shown few signs of resistance to a stronger renminbi, paving the way for currency appreciation”, analysts at JPMorgan wrote in a note. They added that conditions were “favourable for less official resistance to foreign exchange strength overall, especially in the absence of obvious signs of renminbi overvaluation”.

The upbeat Chinese economic data also boosted the country’s stocks. The CSI 300 index of Shanghai- and Shenzhen-listed shares was up 0.6 per cent, reversing initial losses. Hong Kong’s Hang Seng index added 0.5 per cent.

“A tightening labour market and revival in consumer confidence suggests that the recovery in services activity has further to run,” said Julian Evans-Pritchard, senior China economist at Capital economics. He added the Chinese economy was “on track to return to its pre-virus growth rate before the end of the year.”

Elsewhere in the Asia-Pacific region, Japan’s Topix index was down 0.7 per cent and Australia’s S&P/ASX 200 slipped 0.1 per cent.

Futures markets pointed to a slight gain for US stocks when Wall Street opens later in the day, with the S&P 500 tipped to rise 0.2 per cent. Overnight, the blue-chip index rose 1.3 per cent while the tech-heavy Nasdaq added 2 per cent.

FTSE 100 futures were little changed ahead of the London market’s open later on Tuesday.

The dollar, as measured against a basket of its trading peers, slipped 0.2 per cent on Tuesday.

The greenback has dropped about 7 per cent from its peak earlier this year as the US economic outlook has dimmed due to the Covid-19 crisis. But Adam Slater, lead economist at Oxford Economics, said the drop in the dollar “looks more like a correction rather than the beginning of a dramatic collapse”.

“In the early phase of the coronavirus crisis, a steep rise in global risk aversion plus acute international dollar liquidity shortages pushed the dollar up,” Mr Slater said. “These factors have now largely unwound.”

Investors are looking ahead to important decisions this week by central banks including the US Federal Reserve, the Bank of Japan and the Bank of England.

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