Policy stimulus is helping to ease near-term investor pessimism towards China

CNY: PBoC lowers five-year loan prime rate to provide more support 

The major foreign exchange rates have remained relatively stable overnight following yesterday’s US holiday. The dollar index has continued to consolidate at higher levels between 104.00 and 105.00 as it has done for most of this month. The main development overnight was the announcement from the People’s Bank of China (PBoC) that they have lowered the five-year loan prime rate by 25bps to 3.95%. It was the first cut since June and the largest reduction since the revamp of the rate was rolled out in 2019 according to Bloomberg. The rate cut announcement is part of recent efforts to help stabilize the stock market in China and aims to stimulate housing sales which continue to weaken. While the five year loan prime rate was cut by 25bps, the PBoC decided to leave the one-year loan prime rate unchanged at 3.45%. The initial market reaction to further policy stimulus overnight from China has been lukewarm at best. The CSI 300 equity index initially weakened but has since recovered those losses and is on course to close modestly higher (+0.5%) for the sixth consecutive trading session. After hitting its lowest level since early 2019 on 2^nd February, the CSI 300 equity index has staged a strong rebound (~10%) in response to ongoing efforts from domestic policymakers to stabilize the domestic equity market.

The sharp improvement in investor sentiment towards China’s equity market in recent weeks has though failed to reverse weakness in Asian currencies at the start of this year. While the renminbi has remained stable, all other Asian currencies have continued to weaken against the US dollar. The worst performers since 2^nd February have been the THB (-2.5% vs . USD), MYR (-1.6%), KRW (-1.1%) and TWD (-0.9%). Over the same period there has been some improvement in the performance of high beta G10 currencies. The NZD (+1.3% vs. USD), NOK (+1.0%), SEK (+0.9%) and AUD (+0.3%) have all strengthened against the US dollar. While further rate cuts are expected in China, the announcement of more fiscal stimulus could prove more effective at boosting confidence in the cyclical outlook for China economy and potentially have a bigger impact on FX market performance.                   

CHINA’S EQUITY MARKET IS REBOUNDING FROM MULTI-YEAR LOWS

Source: Bloomberg, Macrobond & MUFG GMR

EM FX: Pick-up in US inflation keeps EM FX under downward pressure  

Emerging market currencies have on the whole continued to weaken over the past week against the USD. It has resulted in our EM FX index falling back to the lows against the USD from the autumn of last year. The worst performing emerging market currencies since the start of last week have been the RUB (-1.2% vs USD), CZK (-0.9%), THB (-0.8%), KRW (-0.7%), MYR (-0.6%) and HUF (-0.5%). In contrast, the Latam currencies of the PEN (+1.9% vs. USD), CLP (+0.4%) and MXN (+0.1%) have outperformed.       

The broad-based rebound for the USD supported by the pick-up in US yields has created a more challenging backdrop for emerging market currencies at the start of this year. US yields have continued to correct higher over the past week resulting in the 2-year UST yield briefly rising back above the 200-day moving average at just below 4.70% on Friday. It has been mainly driven by the paring back of Fed rate cut expectations. The recent run of stronger US economic data releases has continued on the whole over the past week including upside surprises from the latest US CPI and PPI reports for January. The reports have provided a temporary setback for the Fed after the marked slowdown in core inflation during the 2H of last year. It has encouraged market participants to further delay expectations for the first Fed rate cut until the June FOMC meeting. We are not expecting the release of the minutes from the January FOMC meeting and/or comments from Fed Vice Chair Jefferson and Governors Bowman and Waller to bring forward rate cut expectations this week.          

Within EMEA EM FX, the Central European currencies of the HUF and PLN have underperformed over the past week. It has resulted in EUR/CZK and EUR/HUF rising back up to 25.500 and 390.00 respectively. Market expectations for deeper rate cuts from the CNB have been reinforced by slower domestic inflation that eased further to 2.3% in January which was well below the CNB’s forecast of 3.0%. Governor Michl has cautioned though that he favours a cautious approach to rate cuts and that the weaker CZK may influence the pace of further easing. Inflation slowed more than expected in Poland as well in January to 3.9% but the negative impact on the PLN was more muted reflecting the NBP’s reluctance to cut rates since last year’s election. The main event risks in the week ahead for EMEA EM FX will be: i) South Africa’s budget review and ii) the CBRT’s first policy meeting under new Governor Karahan. The CBRT is expected to pause their rate hike cycle but maintain hawkish forward guidance to  support market expectations for no significant shift in stance under the new Governor. While South Africa’s budget review poses some downside risk for the ZAR this week, the recent improvement in investor sentiment towards China as outlined above is helping to provide more support for the rand and pulled USD/ZAR back below the 19.000-level. Please see our latest EM EMEA Weekly for more details (click here).

LATAM FX HAS OUTPERFORMED THIS MONTH  

Source: Bloomberg, Macrobond & MUFG GMR

KEY RELEASES AND EVENTS

Source: Bloomberg