Overview: Asian equities were lower, led by a nearly 3% drop in Shanghai, while European shares shrugged it off and the Dow Jones Stoxx 600 is up about 0.4% in late morning turnover. The S&P 500 is off by about 0.25%. Global bond yields were dragged higher by US Treasuries where the 10-year yield is straddling 3.20% after rising four basis points yesterday. The dollar is narrowly mixed. Among the majors, the optics of a strong employment report lifted the Australian dollar after it posted an outside down day yesterday.  The Canadian dollar and sterling were nursing minor loss. The euro recovered by above $1.15 after initially falling to almost $1.1480, a seven-day low. The dollar initially rose in Tokyo to nearly JPY112.75, a new six-day high before backing off to find support near JPY112.45.

China Macro: The US did not cite China as a currency manipulator in the Treasury’s semi-annual report. Although much ink was spilled as nearly all observers agreed that China’s currency management did not reach the threshold of manipulation. Take a step back and consider macro-developments for China in recent years. The current account surplus has been dramatically reduced and in fact, China recorded a current account deficit in H1 18. The currency has appreciated by nearly a third in real terms. In recent years, its reserves have fallen by a trillion dollars. The economy has slowed.

The main US argument against China is that its interventions are not transparent. To the extent that it has intervened, it appears to be to slow even if not reverse the yuan’s decline. The PBOC has eased financial conditions by cutting reserve requirements and not following the Fed in raising rates. It has also appeared to have shifted its priorities toward supporting the economy rather than focusing on financial imbalances. The strength of the US economy and Fed tightening stand in sharp contrast with Chinese developments. The dollar rose to new highs against the yuan today a little above CNY6.94.  Officials had drawn the line at CNY7.0, which we suspect will be eventually challenged and violated.