Policymakers act in China to support growth ahead of May activity data
CNY: PBoC lowers rates to provide more support for economic recovery
The main development overnight has been the announcement from the People’s Bank of China that it has decided to lower their short-term policy interest rate. The 7-day reverse repurchase rate has been lowered by 10bps to 1.9%. It was the first reduction in the rate since August 2022. The PBoC is also expected to announce any adjustments to the rate on one-year policy loans known as the medium-term lending facility on Thursday. The last time the seven-day rate was adjusted before the MLF rate was back in March 2020 at the peak of the negative COVID shock. The PBoC is sending a clear signal that they are now taking action to support growth by providing more stimulus in response to the loss of growth momentum at the start of Q2. The release on Thursday of the latest monthly activity data (retail sales, industrial production & property investment for May) from China are expected to reveal a further loss of growth momentum. The renminbi has weakened further overnight in response to expectations for lower rates in China which has lifted USD/CNY back closer to the highs from last year when it briefly traded above the 7.2000-level last autumn. In contrast, other currencies which are more sensitive to demand from China such as the commodity related currencies have initially strengthened modestly reflecting some optimism that the rate cuts will provide more support for growth. However, it is likely that further policy stimulus will be required to improve investor confidence in the cyclical outlook for China’s that has been deteriorating in recent months. Our forecast for USD/CNY to reverse course and head lower to our year end forecast of 6.7000 is based on our view for a broad-based sell-off for US dollar in response to building expectations for the Fed to cut rates, and our outlook for growth in China to strengthen during the second half of this year. We are encouraged that the PBoC is now being more proactive to support growth and expect more stimulus both monetary and fiscal to be provided in the coming months.
AUD & CNY PERFORMANCE HAS DIVERGED RECENTLY
Source: Bloomberg & Macrobond
GBP: UK labour market report reinforces expectations for further BoE hikes
The main economic data release this morning has been the latest labour market report from the UK. The report revealed that the UK labour market is continuing to prove more resilient than expected, and keeps pressure on the BoE to keep hiking rates to dampen upside risks to the inflation outlook from elevated wage growth. The report revealed that the number of people in employment increased to a record high in the latest quarter. It has increased by 250K over the last three months. The unemployment rate ticked lower by 0.1 point to 3.8%, and has remained relatively stable at just above 3.5% over the past year. There was also further good news as the economic inactivity rate decreased by 0.4ppts to 21.0% which was largely driven by those inactive for other reasons and those looking after family or home returning to the workforce. It offset a further increase in those who are inactive because of long-term sickness which rose to a fresh record high. However, there are still signs that demand for labour is softening. The estimated number of vacancies fell by 79k for the 11th consecutive period as survey respondents continue to cite economic pressures as a factor in holding back on recruitment.
More concerning for the BoE will have been the bigger than expected pick-up in wage growth. In February to April 2023, average regular pay growth for the private sector was 7.6%, this is the largest growth rate seen outside of the pandemic period. The finance and business services sector saw the largest regular growth rate at 9.2%, followed by the manufacturing sector at 7.0%. It was the highest regular growth rate we have seen for the manufacturing sector since comparable records began in 2001. It will keep pressure on the BoE to keep hiking rates for longer than the other major central banks of the ECB and Fed. The UK rate market has even moved to price in a higher probability of the BoE delivering a larger 50bps hike this month. There are currently 29bps of hikes priced in for this month and 105bps of hikes by year end that would take the policy rate to a peak at 5.50%. The resilient performance of the UK economy so far this year and building expectations for a more extended BoE rate hike cycle are continuing to encourage a stronger pound.
EM FX: Carry trades continue to perform well ahead of FOMC meeting
It has been another mixed week for emerging market currency performance. The best performing emerging market currencies over the past week have been the ZAR (+3.6% vs. USD), KRW (+2.8%), PLN (+1.5%), COP (+1.4%), PEN (+1.1%), RON (+1.0%) and BRL (+1.0%). The USD fell to fresh year to date lows against the BRL, COP and MXN. In contrast, the worst performing emerging market currencies have been the TRY (-8.8% vs. USD), RUB (-2.6%), CLP (-1.4%), and CNY (-0.6%).
The TRY has continued to adjust sharply lower following the elections in Turkey at the end of last month. The price action suggests that policymakers are taking a more hands off approaching by allowing the TRY to fall to more competitive levels which marks an abrupt shift from interventionist policies to prop up the TRY ahead of the elections. Bloomberg estimates that intervention totaled up to USD200 billion from December 2021 to May 2023. At the same time, there is building speculation that the shift away from unorthodox policy settings in Turkey will be reinforced soon by a sharp tightening in monetary policy settings. President Erdogan has appointed a new CBRT Governor to usher in a new phase for policy. New Governor Erkan’s first policy meeting is scheduled to take place on 22nd June, and we expect the policy rate to be raised closer to 30%. It remains to be seen whether this is implemented as one big adjustment to higher rates or in several steps. Recent developments are consistent with more of a front-loaded adjustment lower for the TRY than we had been expecting. The FX forwards are expecting USD/TRY to move closer to the 30.000-level this year.
The key event for emerging market currencies in the week ahead will be the FOMC meeting on Wednesday. Market participants are expecting the Fed to slow the pace of hikes by leaving rates on hold for the first time during the current hiking cycle. The lack of pushback against those expectations over the past week suggests that the Fed is comfortable with current market pricing. The main risk to that view is the release of the latest US CPI report later today. It would have to reveal a significant upside surprise for core inflation to trigger a reversal of USD weakness so far this month. Popular emerging market carry currencies would be hit the hardest if developments this week trigger a hawkish repricing of Fed rate hike expectations. Carry trades have become more even attractive recently as Global FX volatility has fallen back to pre-Ukraine conflict levels from in early 2022. The top 5 performing EM currencies this year (COP, MXN, HUF, BRL, and CLP) all have policy rates in double digits. Please see our latest EMEA EM Weekly for more details (click here).
KEY RELEASES AND EVENTS
|
Country |
BST |
Indicator/Event |
Period |
Consensus |
Previous |
Mkt Moving |
|
GE |
10:00 |
German ZEW Economic Sentiment |
Jun |
-12.7 |
-10.7 |
!! |
|
US |
11:00 |
NFIB Small Business Optimism |
May |
88.5 |
89.0 |
! |
|
US |
13:30 |
Core CPI (MoM) |
May |
0.4% |
0.4% |
!!! |
|
US |
13:30 |
CPI (MoM) |
May |
0.2% |
0.4% |
!!! |
|
UK |
15:00 |
BoE Gov Bailey Speaks |
-- |
-- |
-- |
!!! |
|
UK |
16:00 |
BoE MPC Member Dhingra Speaks |
-- |
-- |
-- |
! |
Source: Bloomberg
