But the Yuan is now back to where is was at the start of 2016, with foreign exchange reserves rising in March. Some of these gains have been put down to a weaker US dollar, but this shift is unlikely to be driven entirely by valuation changes given the change in behaviour in offshore RMB rates in the last month or so.
This stabilization may only be temporary. But it does suggest the risks are shifting, particularly given the signs of a modest shift in momentum in the Chinese economy. This story is may not generate as many headlines, but is critically important to commodity markets.
This stabilization may only be temporary. But it does suggest the risks are shifting, particularly given the signs of a modest shift in momentum in the Chinese economy. This story is may not generate as many headlines, but is critically important to commodity markets.
The appreciation in the yuan and increase in FX reserves (as a sign of capital inflow), is similar to what occurred in October. This proved to be a temporary respite given the significant depreciation in following months on the back of significant capital outflows in November to January. So recent history suggests one month is not enough to shift the bigger picture.
But it does appear that the trajectory for economic activity has shifted in the last few months. Growth in China was weaker than expected at the end of 2015. Many expected a small improvement on the back of policy easing, but the reality was that things got worse.
There are now an increasing number of indicators suggesting that growth in China has improved heading into 2Q16. For example, the PMI data moved back above 50 for the first time in many months. Steel production also looks to have climbed towards levels seen around this time last year.
None of this suggests that growth is particularly "strong". But it only has to be a little bit stronger than expected to have significant implications for many markets. For example, the expectation that the Chinese yuan would continue to depreciate 5-10pc over the next 6 months looks more challenging if the Chinese economy is improving. Forecasts for commodity prices will probably need to change in light of the upside we have seen in the last few months, particularly in steel prices.
Many will point to the structural impediments to growth as a reason why the recent improvement in Chinese economic indicators, capital inflows and commodity prices can not be sustained. While that may ultimately be the case, we cannot ignore the current shift in macroeconomic risks just because it wasn't part of the script that many had laid out for 2016.