Forex Investment and Currency Trading

The slower pace of CNY appreciation has continued with a CNY/USD gain of only 0.35% since the beginning of April. Looking forward the current, more gradual pace could persist given the likely CPI moderation in 2Q and increasing signs of weaker export growth. April CPI, due next Monday, is expected to moderate slightly to about 8% from 8.3% in March. Accordingly, the chance of another interest rate hike in May has been reduced, particularly after the latest Fed rate cut further widened the US-China interest rate spread. Meanwhile, concerns over a possible export slowdown could limit the scope for CNY appreciation ahead. As central bank governor Zhou Xiaochuan acknowledged, export growth has seen a significant decline since 4Q 2007 after averaging 27% in 1-3Q 2007 to 21.4% in 1Q 08, largely on account of weaker US imports and the winter storms. April export growth, due next week, likely dipped from 30% in March due to a high base effect and declining export orders growth. A local survey reported that the April exports orders index slipped to 53.4, 5.7 percentage points lower than the March index. However, the recent 10% full year export growth forecast by the Ministry of Commerce seems to be overly pessimistic as strong demand from emerging markets should partly offset the weakness from the US. Furthermore, some CNY appreciation could actually benefit the export competitiveness of processed products (that rely heavily on imported components) that account for nearly half of total exports and thus cushion the slowdown of overall export growth. Nonetheless, the trend of slower export growth for the full year is almost certain, which could put export manufacturers’profitability under pressure and, more importantly, threaten employment. A more gradual pace of CNY appreciation is likely, as it will mitigate the negative impact on exports. However, market does not expect a reversal of appreciation, as the full year economic growth likely will be well above the 8% official target, affirmed by a vice finance minister. Market expects stable economic growth to support continued appreciation of CNY, but at a slower pace, to 6.65 versus the USD at year end.