China resistance to CNY weakness builds

CNY & AUD: US dollar weakens as China resists CNY weakness

Today we had more indications from the Chinese authorities that they are resistant to continued CNY depreciation and the broader dollar depreciation of late may now be prompting more aggressive steps to ensure no CNY depreciation on a TWI basis. The PBoC’s fixing reference today was set at 7.1466 which was much higher than the market estimate of 7.2146 – it was in fact the widest divergence since last November. The fixing had an immediate impact for the dollar more broadly with the DXY index dropping modestly on the announcement. In a further attempt to diminish demand for the US dollar, the authorities announced an increase in the allowance for companies and financial institutions to borrow from abroad. Finally, the Communist party and the government issued a joint statement pledging to improve corporate confidence by treating private companies the same as state-owned. There was little detailed plans in the statement however although this may signal a turning point toward less interference in the private sector which over time will help sentiment.

Within G10, the Australian dollar is the top performer today and the China news is certainly part of that although the AUD CNY correlation has clearly broken down. In addition, there was positive jobs data released which has prompted a notable jump in short-term yields – the 2yr government bond yield is up 12bps. The data revealed a 32.6k increase in employment in June, more than double the market consensus, which followed a large 76.5k increase in May. The decision of the RBA to hold steady with rates on 4^th July was deemed to be a “hawkish hold” with the guidance indicating that further tightening “may be required”. This would be dependent on the incoming economic data and based on that guidance it certainly increases the prospect of a 25bp rate hike on 1^st August.

We do still have the Q2 inflation data next week before that meeting so a rate hike is not a done deal and a much softer CPI print could persuade the RBA to remain on hold.  Furthermore, monthly CPI data now means the Q/Q data is generally less of a surprise for the markets and investors. The consensus is for a drop and the theme of late elsewhere does favour a softer print. So any upside surprise at all would probably see the RBA act. The continued weak economic conditions in China favour caution although there is certainly increased global investor optimism over a soft landing in the US which could encourage the RBA to act. It remains a close call. The OIS market implies around a 50-50 chance for the August meeting although there is about 35bps priced by year-end. Given the jobs data, and given we already assumed another hike after a July pause, we see it as more likely that the RBA hikes which should help provide support for AUD over the coming weeks.

AUD SUPPORTED WITH CNY WEAKNESS MORE CHINA-SPECIFIC

Source: Bloomberg, Macrobond & MUFG GMR

NZD: Inflation data underlines RBNZ hold stance

The New Zealand dollar is the worst performing G10 currency over the last five trading days and weakened further against the US dollar yesterday – the broad dollar rebound was reinforced by the drop in New Zealand inflation, released yesterday, that is consistent with the RBNZ remaining on hold and indeed being finished with its tightening cycle. In recent days the New Zealand dollar has underperformed the Australian dollar as well with global growth optimism helping provide AUD with greater support. That reversed somewhat briefly yesterday but we continue to see scope for AUD/NZD to advance further and today’s employment data will help. We continue to hold a long AUD/NZD trade view, published in our FX Weekly (here). A divergence in monetary policy ahead still seems plausible to us, which will help provide upside momentum.

While the New Zealand inflation data for Q2 showed less of a decline from the Q1 reading (6.7% to 6.0% versus 5.9% expected), the drop was a slightly more than the RBNZ expected (6.1%) which is crucial for the markets and suggests scope for inflation to undershoot projections going forward. Like in some other countries over recent months there was evidence of inflation stickiness with the tradeable inflation component coming in weaker than expected, at 0.8% Q/Q (0.9% expected) but the non-tradeable was stronger at 1.3% Q/Q (1.0% expected). The RBNZ’s Sectoral Factor Model Inflation measure remained unchanged at 5.8% YoY – this RBNZ core inflation measure is another sign of sticky inflation. Still, while there are some signs of inflation stickiness, the drop below the RBNZ’s projection for Q2 and the fact that the New Zealand economy is in recession means the RBNZ will continue to keep policy on hold.

The bias in the NZ rates market is still modestly higher rates which seems more influenced by the hawkish rhetoric of the RBNZ rather than the data. We see risks skewed to inflation coming down more quickly and the market gradually starting to price for rate cuts in 2024. Coupled with a poor external position we continue to see risks of underperformance relative to other G10 currencies. New Zealand’s current account hit a record deficit in Q3 2022 and the four-quarter rolling sum remains close to a record with the deficit equal to 8.5% of GDP.

PEAK RATES, RECESSION & RECORD C/A DECICIT WILL LIKELY TRANSLATE TO NZD UNDERPERFORMANCE

Source: Macrobond

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
EC	09:00	Current Account	May	--	4.0B	!
EC	09:00	Current Account n.s.a.	May	--	4.2B	!
US	13:30	Continuing Jobless Claims	--	1,730K	1,729K	!
US	13:30	Initial Jobless Claims	--	242K	237K	!!!
US	13:30	Jobless Claims 4-Week Avg.	--	250.01K	246.75K	!
US	13:30	Philadelphia Fed Manufacturing Index	Jul	-10.4	-13.7	!!!
US	13:30	Philly Fed Business Conditions	Jul	10.0	12.7	!
US	13:30	Philly Fed CAPEX Index	Jul	6.20	9.90	!
US	13:30	Philly Fed Employment	Jul	-4.5	-0.4	!!
US	13:30	Philly Fed New Orders	Jul	-10.0	-11.0	!
US	13:30	Philly Fed Prices Paid	Jul	10.70	10.50	!!
US	15:00	Existing Home Sales	Jun	4.21M	4.30M	!!
US	15:00	US Leading Index (MoM)	Jun	-0.6%	-0.7%	!
EC	15:00	Consumer Confidence	Jul	-16.0	-16.1	!

Source: Bloomberg