China growth optimism creates new headwind for USD alongside Fed easing

CNY: Stimulus optimism continues to build in China

The renminbi has strengthened overnight alongside other Asian currencies and the commodity-related G10 currencies of the Australian and New Zealand dollars supported by building investor optimism over the growth outlook in China. Improving investor sentiment towards China has been reinforced by reports that the Politburo has vowed to complete the country’s annual economic goals according to the official Xinhua News Agency. Officials have reportedly said that the government needs to ensure necessary fiscal spending and stabilize the real estate market including strictly limiting the supply of new commercial housing construction. The Politburo also reportedly called on the “forceful” implementation of cuts to interest rates and the reserve requirement ratio for banks. The Politburo normally devotes only its April, July and December sessions to discuss the current economic situation with the last time such discussions took place outside of those months was back in March 2020 when the COVID shock hit. The Politburo’s discussions quickly follows the release of a comprehensive package of easing measures earlier this week (click here). The latest news has helped to boost investor confidence that domestic policymakers are now willing to take more decisive action to support economic growth after the disappointing run of activity data over the summer. Market participants are now eagerly waiting to see what steps will be announced to loosen fiscal policy in China which is judged as more effective at supporting economic growth.

At the same time, Bloomberg has reported that China is considering injecting up to CNY1 trillion of capital into the biggest state banks to increase their capacity to support the struggling economy according to people familiar with the matter. The funding will mainly come from the issuance of new special sovereign bonds although the details have yet to be finalized and are subject to change. If the report proves to be correct then it would be the first time since the global financial crisis in 2008 that the government has injected capital into the biggest state banks. According to Bloomberg, the top six banks in China have capital levels that far exceed requirements but they are facing pressure from record low margins, sinking profits and rising bad debts. The nation’s top banking regulator stated earlier this week that the authorities would act to boost core tier 1 capital at the six major commercial banks             

Together the developments this week give us more confidence that domestic policymakers are now taking more decisive action to support growth in the near-term which will provide more support for the renminbi, other Asian and commodity-related currencies heading into year-end although we are still eagerly waiting for details of updated fiscal spending plans. The potential improvement in the global growth outlook triggered by a temporary pick-up in China demand has created another headwind for the US dollar alongside the faster pace of Fed easing.          

CHINA GROWTH OPTIMISM BOOSTS ASIA & COMMODITY FX

Source: Bloomberg, Macrobond & MUFG GMR

CHF & JPY: Giving back recent gains ahead of SNB & LDP leadership election

The low yielding funding currencies of the Swiss franc and yen have underperformed over the last couple of week as global equity markets have risen to fresh record highs. The improvement in investor risk sentiment has been encouraged both by the Fed’s decision to deliver a larger 50bps rate cut to start their easing cycle, and more recently by the package of easing measures announced by domestic policymakers in China. Together the policy steps have boosted investor confidence in the outlook for a softer landing for the global economy. Since the recent low for MSCI’s ACWI global equity index on 11^th September, the yen and Swiss franc have been amongst the worst performing G10 currencies alongside the US and Canadian dollars. It has helped to lift EUR/CHF back up closer to the 0.9500-level up from this month’s low of 0.9307.

The sell-off for the Swiss franc likely reflects in part some speculation that the SNB could follow the Fed and deliver a larger 50bps rate cut today to help weaken the franc. The Swiss rate market is currently pricing in just under a 50:50 probability of larger 50bps cut this morning. As a result, the Swiss franc could stage a relief rally this morning if the SNB disappoints expectations for a larger cut. While we see justification for a larger cut to address Swiss franc strength and low inflation in Switzerland, the SNB could prefer to stick to gradual 25bps cuts today. They started their easing cycle ahead of other G10 central banks and have less room to keep cutting rates. Instead they could choose to deliver a stronger signal to warn over the use FX intervention if needed to weaken the franc.

The yen has underperformed alongside the Swiss franc in recent weeks. The yen sell-off has accelerated after last week’s BoJ policy meeting at which Governor Ueda sent a more cautious signal over the need for further rate hikes in the near-term. The sharp strengthening of the yen over the summer and financial market instability has prompted the BoJ to push back against market expectations for another rate hike a soon as next month. Risks from the upcoming LDP leadership election (click here) at the end of this week could also be encouraging some lightening of long yen positions.    

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
SZ	08:30	SNB Interest Rate Decision	Q3	1.00%	1.25%	!!!
SZ	09:00	SNB Press Conference	--	--	--	!!!
EC	09:00	ECB Economic Bulletin	--	--	--	!!
EC	09:00	M3 Money Supply (YoY)	Aug	2.5%	2.3%	!
US	13:30	Durable Goods Orders (MoM)	Aug	-2.8%	9.9%	!!
US	13:30	GDP (QoQ)	Q2	3.0%	1.4%	!!!
US	13:30	Initial Jobless Claims	--	224K	219K	!!!
US	14:10	Fed Collins Speaks	--	--	--	!
US	14:10	FOMC Member Kugler Speaks	--	--	--	!
US	14:15	FOMC Member Bowman Speaks	--	--	--	!!
US	14:20	Fed Chair Powell Speaks	--	--	--	!!!
US	14:25	FOMC Member Williams Speaks	--	--	--	!!
EC	14:30	ECB President Lagarde Speaks	--	--	--	!!
US	15:30	Fed Governor Cook Speaks	--	--	--	!

Source: Bloomberg