BOTTOM LINE: EXPECT TWO MORE RRR HIKES BY END Q3 AND STAY SHORT USDCNH.
DONNA KWOK : China’s GDP was a touch higher than what markets expected at 9.6%yoy, but it decelerated nonetheless versus 1Q’s 9.7%yoy. The fact that sequential growth momentum held steady (GDP rose 2.2% on the quarter, seasonally adjusted) means that China is far from a hard landing of any sort. Moreover, despite recent hikes and continued property tightening measures, both retail sales and IP accelerated faster than expected in June. As such, with inflationary pressures still elevated, we don’t think Beijing is ready to stop monetary tightening just yet. So expect two more RRR hikes but zero rate hikes before the monetary tightening cycle wraps up by end-Q3.
DANIEL HUI : RMB: Strong China data unlikely enough to make us forget about Euro sov credit worries for any lasting time, but it does neutralize concerns about the upside Chinese inflation surprise over the weekend. Earlier, the risk was that China was having difficulty managing a soft landing, and was facing a deteriorating growth-inflation tradeoff. Today’s strong activity numbers confirm that inflation was high in-part because growth still remains very solid. We maintain that tightening is not quite over yet (2 RRR hikes before end-3Q), and that that China will likely engineer a soft landing. Ongoing stability in China should help continue buffering Asian currencies. Given volatiltiy in the G10 space, we prefer to express RV views. We like long S$NEER, short USD-CNH, and long SGD-TWD.
HSBC Global Research