Asia FX Talk - China A shares on a tear

Ahead Today

G3: US JOLTS Job Openings, US ISM Manufacturing, Eurozone CPI

Asia: India PMI, Indonesia inflation

Market Highlights

Fed Chair Powell said that the US central bank will lower interest rates “over time” in a speech overnight, with policy moving towards a neutral stance if the economy evolves broadly as expected, even as he continued to emphasise that the Fed was not on any preset path. He also said that this was not a FOMC committee that feels like it is in a hurry to cut rates quickly, while reiterating the key message since Jackson Hole that further cooling in the labour market is not desirable nor needed to achieve 2% inflation. Meanwhile Atlanta Fed President said that he is open to another half a percentage point interest rate cut if upcoming data shows job growth slowing faster than expected. The overall message from the Fed is that the labour market is key, and this Friday’s non-farm payrolls will be important in this regard to gauge the path of Fed policy.

China’s onshore A shares market surged by 8.4% on Monday ahead of the National Day break, with several stocks hitting circuit breaker limits with record volumes as well. This brought the rise since the bevy of stimulus measures announcements last week to more than 20%. It’s unclear how much of this was driven by foreign versus local buying given that the Northbound data release has stopped, but our sense is that there’s a bit more domestic money at play here at least in this initial phase of the rally. Whether this can continue will most certainly depend on the path of fiscal policy, and also whether the central government leverages up to repair the balance sheets of vulnerable entities including banks, local governments and property companies. 

Regional FX

Asian FX markets were generally weaker, on the back of a stronger Dollar overnight as Fed Chair Powell did not provide any clear-cut guidance on the path of rate cuts. USDCNH in particular rose to the 7.000 level again, while MYR (-0.4%),SGD (-0.3%), INR (-0.19%), and PHP (-0.15%) all softened. In India, news reports suggest that the government may reveal new external members for the RBI Monetary Policy Committee tomorrow, replacing Ashima Goyal, JR Varma and Shashanka Bhide. The terms of these external members end on 4 October, and also comes ahead of the RBI’s monetary policy decision on 9 Oct. Given that two out of three external MPC members were already dovish (Goyal and Varma), we do not expect the announcement to materially change the leanings of the RBI’s MPC at least initially. The more crucial change markets will be watching out for will be in December when Governor Shaktikanta Das’ term ends, and in January when Deputy Governor Michael Patra’s term ends. We continue to see the RBI starting a shallow rate cut cycle of 50bps probably from January next year.