Plunging Chinese Exports Put USD at Risk

Jittery Chinese markets will be put to the test early in the week after Saturday data showed very weak  exports. The focus will remain on trade with Japanese data up next. Weekly CFTC positioning numbers showed the most-extreme net USD long since early-June.

Chinese exports fell 8.3% y/y in July, far short of the 1.5% contraction expected. That took a chunk out of the trade surplus, leaving it at $43B compared to the $55B forecast. It raises fresh questions about the health of the economy in light of the stock market plunge. It will also put fresh pressure on officials to stimulate growth.

Once source of concern could be CPI at 1.6% y/y versus 1.5% expected but that's still in a safe range for tightening. In addition, the producer price index fell 5.4% y/y which puts deflationary pressures in the pipeline. It was also a six-year low.

There is some talk that China may use exchange rate depreciation as a stimulus tool. That would work provided its competitors don't retaliate. It's also something the Fed would need to consider with more marketwatchers leaning toward a September rate hike.

FX pressures and commodity devaluation aren't high on the Fed's list of worries but towards the end of the year they will be a negative factor for inflation and growth. It could mean a Sept hike is one-and-done and the US dollar is already near a top.

Another economy that may choose to stimulate and depreciate is Japan. A portion of the decision will come down to how exporters are performing in the current environment. Data at 2350 GMT is expected to show a 119B yen surplus in June but a soft reading may get the BOJ thinking about more QE.

Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +. EUR -113K vs -104K prior JPY -80K vs -63K prior GBP -7K vs -10K prior AUD -50K vs -51K prior CAD -64K vs -56K prior MORE DETAIL ON CAD & OIL CHF -1.5K vs 0K prior

The market is getting increasingly comfortable betting against the commodity currencies. Positions are now near extremes and that's a warning sign.