A stronger CNY as China steps up policy support

CNY: China steps up policy support to address economic weakness

The renminbi and other Asian currencies have strengthened overnight following the announcement of fresh stimulus measures to boost growth in China. It has resulted in USD/CNY falling to an intra-day low overnight of 7.0320. The best performing Asian currency has been the Malaysian ringgit which has strengthened by around +0.7% against the US dollar. The new policy measures have been welcomed by the domestic equity market with the Shanghai composite index on track for its biggest one-day gain since July 2020. The package of stimulus measures included rate cuts. The required reserve requirement (RRR) was lowered by 50bps alongside providing forward guidance for the first time that signalled there is room for further 25-50bps RRR cuts during the rest of this year, and the the 7-day reverse repo rate was lowered by 20bps to guide down both lending and deposit rates by around 20-25bps to keep bank NIM stable.

Alongside the rate cuts, broader support was provided for the housing market including: i) a 10bps cut in the national floor for second home down payment ratio to a record low of 15% and a ~50bps cut in existing mortgage rates toward levels close to new mortgage rates, and ii) raising the pledged relending coverage on social housing buyback program from 60% to 100%.

Furthermore, the PBoC established new liquidity-supporting tools for the stock market including: i) CNY500billion swap facilities for qualified insurance companies, asset management firms, and securities companies to buy stocks, and ii) CNY300 billion relending facilities for listed companies to conduct stock buybacks. The PBoC also added that a market stabilization fund is being discussed. It now means that the “national team” can tap into the PBoC’s balance sheet for liquidity.

The package of rate cuts, and more specific support for the weak housing market and stock market has helped to boost investor confidence by highlighting that domestic policymakers are stepping up efforts to support economic growth and avoid deflation. It still remains to be seen how effective the new measures will prove to be at stimulating growth. Overall, the developments are supportive for our outlook for USD/CNY to keep moving modestly lower (click here).      

PMI SURVEYS HEIGHTEN CONERN OVER EZ ECONOMIC RECOVERY

Source: Bloomberg, Macrobond & MUFG GMR

EUR: Weak PMI surveys encourage expectations for faster ECB rate cuts

Fresh policy stimulus has provided some welcome news for the euro as well given the euro-zone economy is more tightly linked through trade to demand from China than the US economy. It comes at a time when the euro-zone economy appears to be slowing after the pick-up in growth in the 1H of this year. The release yesterday of the latest PMI surveys from the euro-zone for September revealed that business confidence continued to deteriorate more quickly than expected in Q3. The composite PMI for the euro-zone fell back below the 50.0-level in September to 48.9 from 51.0 in August. It was the second consecutive monthly drop and takes it further below the high set in May at 52.2. It suggests that the euro-zone economy could be struggling to grow again in the final quarter of this year. Weakness in business confidence was mainly driven by France and Germany who recorded composite PMI readings of 47.4 and 47.2 respectively. One positive form the PMI surveys was that inflation pressure in the services sector appears to have eased further. The prices charged component declined to 52.0 in September from 53.7 in August.

The softer PMI surveys have encouraged speculation that the ECB will speed up the pace of rate cuts in response to the loss of growth momentum in the euro-zone. The weak PMI surveys add to concerns that the ECB’s policy rate is still too tight and risks snuffing out the nascent economic recovery in the euro-zone. While the ECB indicated at this month’s policy meeting that they are more likely to wait until December to cut rates again when they will have more data on the performance of the euro-zone economy in Q3 available, euro-zone rate market participants have been encouraged by the weak PMI surveys to more fully price in another 25bps rate cut as soon as next month. Even if the ECB decides to skip cutting rates again in October, market participants are likely to anticipate that it is only a matter of time before the ECB has to speed up rate cuts by delivering a larger 50bps in December. The negative development will help to put a dampener on further upside for the euro against the US dollar, and have reinforced the euro’s weakening trends against the pound and yen.    

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
GE	09:00	German Ifo Business Climate Index	Sep	86.1	86.6	!!
US	14:00	FOMC Member Bowman Speaks	--	--	--	!!
US	14:00	S&P/CS HPI Composite - 20 s.a. (MoM)	Jul	--	0.4%	!
GE	17:00	German Buba President Nagel Speaks	--	--	--	!!
CA	17:55	BoC Gov Macklem Speaks	--	--	--	!!

Source: Bloomberg