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- China trade data for July shows fall in US trade volumes

- Same data shows a rise of over 50% in Eurozone imports

- Data suggests major shift in allegiances

The Euro shrugged off mixed German data midweek after indications China is enjoying a boost in trade with the EU, just as its trading relationship with the US deteriorates.

July trade data from China showed a fall in trade with the US but a marked rise of 51.7% in imports from the Eurozone.

"The common currency appears to be benefited from China trade data. The set of data clearly showed that China is turning to the EU for trade, in rather drastic and speedy way in July," says a midweek note from Actionforex.

July's trade data showed Chinese exports to the US fell by 2.5% compared to June and imports from the US fell 1.5% month-on-month.

Despite the surge in imports, China's exports to Europe also showed a contraction of 2.3%, which may have been due to seasonality.

The rapid rise in demand from China suggests the birth of a major new positive driver for the Euro.

The change in trade dynamics could also change the way forex markets react to trade news which has traditionally been supportive for the US Dollar predominantly.

"Since early part of the year, Dollar has always benefit from Trump’s escalation in trade conflicts. But going forward, it’s worth a watch on Euro’s reactions to Trump’s comments on trade with China," say Actionforex.

Some economists were cautious, however, about drawing too many conclusions about the impact of trade tariffs from only one set of data.

"China's imports from Europe increased substantially by 51.7% MoM," says Irish Pang, Asia economist at ING Bank NV. "Could China's importers switch their source of goods from the US to Europe? It is possible but we need more data to confirm this is a trend caused by tariffs."

Yet overall Pang sees some impact from tariffs which is likely to increase over time.

"The only thing we can conclude is that the tariff impact in July was not obvious but subtle monthly changes show that tariffs are changing the behaviour of some exporters and importers, and we expect this to become more visible in the coming months," continued Pang.

Chinese Q3 GDP could be hurt if the US goes ahead and increases tariffs from 10% to 25% on $200bn worth of Chinese imports. These extra measures would start on August 23, says ING.

Overall, gross Chinese exports beat estimates in July rising by 12.2% when they had been forecast to only rise 10.0%. The weaker Yuan was given as one reason for the unexpectedly high figure.

The Chinese government and central bank is already implementing new policies to counter the effect of tariffs.

The Peoples Bank of China (Pboc) has eased monetary policy by lowering interest rates to make borrowing more affordable and accessible and recent reserve data indicted it has also probably been intervening directly in currency markets to shield the falling Yuan.

Are the measures likely to be enough?

"We believe that the government's pre-preemptive policies will be able to offset some of the negative impact from tariffs," says ING's Pang.

The Euro was trading at 1.1592 to the US Dollar, at the time of writing on Wednesday, marginally down after a strong open which saw the Euro soar to highs of 1.1682 on the back of the new twist to the trade war saga.

The single currency was up over half a percent versus Sterling, with GBP/EUR trading back down in the 1.10s on Brexit fears.

Versus the rising Yen, the Euro was the least weakest of the majors, trading at 128.07 at the time of writing.

German data on Tuesday showed a rise in trade but fall in industrial production.

The trade surplus rose to EUR 21.8bn in June from 19.6bn in May although it was lower than the 22.1bn in June 2017, a year ago.

German exports beat expectations by showing no-change when they had been forecast to fall -0.4%. Imports swelled 1.2% when they had been expected to rise my only a meagre 0.2%.

Industrial Production in June, however, came out at -0.9% lower compared to May, which was well below the -0.5% expected.

On Monday data showed a shock -4.0% slump in factory orders in Germany in June compared to May, compared to -0.3% forecast.

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