China Goes Big, and Market (Initially) Gives it the Benefit of the Doubt

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Marc Chandler
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Overview: News of China's multifaceted support measures have bolstered risk appetites today. The dollar is mostly softer and only the yen and Swiss franc among the G10 currencies have been unable to find traction against the greenback. Most emerging market currencies are also trading with a firmer bias. China's measures include measures to support the stock and housing markets. The seven-day repo rate was cut by 20 bp (to 1.50%) and reserve requirements were cut by 0.5%. 

China's CSI 300 rallied 4.3% and an index of mainland companies that trade in Hong Kong jumped over 5%. It helped spur an equity rally not only in the region, but Europe's Stoxx 600 is up almost 0.6% and US index futures are trading higher. Yields in the Asia Pacific were softer, and the Reserve Bank of Australia's hold seemed a little less hawkish than previously. However, European benchmark 10-year yields are mostly 2-4 bp higher, but the Gilt yield is up six basis points to almost 4%. The 10-year US Treasury yield is four basis points higher near 3.80%. Gold is steady after setting a record high near $2940 today. China's stimulus appeared to lend crude oil support. November WTI is up about 2.5% today and it is pushing above $72 a barrel for the first time since September 3. 

Asia Pacific

The sharply lower dollar fix by the PBOC last Friday was an important signal. Yesterday, the PBOC gave the market another signal with a 10 bp cut in the 14-day reverse repo rate. Today, it went big. It cut reserve requirements by 0.50% (freeing up CNY1 trillion or $142 bln) and cut the 7-day repo rate by 20 bp (to 1.5%). The PBOC also announced CNY800 bln support for the stock market (CNY500 bln swap facility and a CNY300 bln re-lending facility. This could later be scaled up, if needed. The central bank also indicated that it was considering a state-backed stabilization fund, which it has used in the past (2015). There were also new measures to support the housing market. The PBOC increased the backstop for local governments buying houses from 60% to 100% and cut the minimum down payment for second home purchases. 

As widely expected, the Reserve Bank of Australia stood pat and reiterated that it is too early still to reduce rates. Governor Bullock indicated that unlike the last meeting, there was not discussion to cut rates, and this saw the Australian dollar unwind early gains. Still, the central bank does not expect the 2-3% inflation target to be reached until 2026. The market shaved the chances of a rate cut, which in the futures market is hovering slightly above 50%. Australia's 2–3-year yields were off 10-11 bp. Tomorrow's release of the August monthly CPI print (median forecast in Bloomberg's survey is at 2.7%, vs 3.5% in July). Japanese markets reopened from the long-holiday weekend. There are two developments to note. First, the preliminary PMI was reported. Japanese markets typically are not particularly sensitive to this survey. Still, the data points to the continued recovery of the world's third largest economy. The composite PMI slipped for the first time in three months, as the weakness in manufacturing more than offset the small tick up in services. Second, this is an important week for Japanese politics. The highlight is the LDP leadership contest, which will determine the country's next prime minister, late in the week. The main opposition party, the Constitutional Democratic Party selected a new leader, former Prime Minister Noda. The LDP's coalition partner, Komeito, will formally pick its current secretary general, Ishii, as its first new leader in 15-years. Many expect the new prime minister will quickly call for an early election. 

The dollar spent yesterday consolidating in the upper end of the pre-weekend range. Unlike last Monday when the market took the greenback below JPY140 briefly. Yesterday, it respected the cap at JPY144.50 and found support near JPY143.20. It made a marginal new high today near JPY144.70. Higher US rates could encourage a test on JPY145 next. In anticipation of today's RBA decision, the Australian dollar was bid to new highs for the year near $0.6855. It finished firmly and extended its gains today. It reached $0.6870 before pulling back on Bullock's press conference. It found support near $0.6815. Although the dollar fell against the yen, it rose against the yuan yesterday, as the market anticipated that the sharply lower dollar fix before the weekend and yesterday's 10 bp cut in the 14-day reverse repo, was setting the stage for today's announcement. Of the myriad of challenges China faces, too high of interest rates does not seem to be particularly salient or pressing. There are some points in the larger financial and economic cycle in which the lower price of money does not boost demand. Officials recognize the importance of boosting domestic demand (of which consumption is part but so is investment and construction). Still, the like the yen, the offshore yuan consolidated within the pre-weekend range yesterday, but softer. The PBOC set the dollar's reference rate at CNY7.0510 (CNY7.0351 yesterday).

Europe

It is a quiet week for eurozone and UK market-moving data. The German IFO September survey confirmed what we already knew. Europe's biggest economy remains in the doldrums. The highlight of the week is tomorrow's likely rate cuts by Sweden's Riksbank and the Swiss National Bank. Both have cut rate twice so far this year and will likely cut rates again in Q4. The market is pricing in about a 30% chance that the Riksbank delivers a 50 bp cut and a little more than 50% of a half-point cut at next meeting (November 7). The swaps market is pricing in closer to a 40% chance that the SNB delivers a 50 bp cut this week in its deposit rate of 1.25%. The EU harmonized measures of CPI stood at 1.0% in August down from a little above 2% at the end of last year. The Swiss economy grew by 0.7% quarter-over-quarter in Q2 24, the best performance in Q2 24. The Swiss franc has fallen by around 2% against the euro this year but recorded nine-year high in early August.

For over month, the euro has chopped between $1.10 and $1.12. It was sold a little below $1.1085 yesterday after the disappointing PMI. It recovered to around $1.1140 before the end of the European session. It consolidated for the remainder of the session, holding above the $1.1115 area. The euro is firmer today but in a roughly $1.1100-$1.1145 range. The US two-year premium widened against Germany for the third consecutive session yesterday, the longest advance in a couple of months and it is edging higher today. We do not find a one-to-one correspondence between the level of the level of the spread and the exchange rate. Instead, the change and direction seem more important. The widening of the US premium could deter another near-term run at $1.12. A break of $1.1070 sets up a retest on $1.10, which the single currency has not traded below since mid-August. Sterling posted a bullish outside day by trading on both sides of last Fridays range and settling above Friday's high. By doing so, sterling reached a new two-year high near $1.3360, and a little follow-through buying today lifted it to $1.3380. The $1.3400 area is the next target, and there are about GBP750 in options there that expire today. Not totally unrelated, the euro slumped to a two-year low against sterling near GBP0.8330. Of note, it settled three standard deviations below its 20-day moving average, which is extreme. Itis a little firmer today after initially extending its losses. 

America

The most important US data are concentrated on Thursday and Friday this week. The Q2 GDP is subject to revision Thursday. The other two reports, August durable goods orders and weekly initial jobless claims may point different directions. Dragged lower by a drop in Boeing orders, durable goods orders likely fell sharply (~3%) after a 9.8% surge in July. Excluding aircraft and military orders, durable goods orders may have eked out a 0.1% gain after falling by as much in July. Weekly jobless claims may draw more attention than usual after last week's report covering the week through September 14 fell to the lowest level since May. The four-week average was the lowest in three months. Still, the early forecast for the September nonfarm payrolls is for a 125k increase, which, if accurate, and before new revisions, would be slightly above the three-month average. Mexico reports the CPI for the first half of September. The headline and core rates are expected to soften, and this set the stage for the central bank meeting on Thursday. The swaps market sees it as a close call. We suspect that the Fed's 50 bp cut will tempt Banxico to ease policy by 25 bp, which would bring the overnight rate to 10.50%.

The Canadian dollar rose by a little more than 0.2% yesterday. The US dollar fell through CAD1.35 for the first time in three weeks but recovered and settled near CAD1.3540. It is offered today and re-testing the CAD1.3500 area in the European morning. Nearby support is in the CAD1.3440-60 area. The momentum indicators have turned down, suggest a test on the CAD1.3400 area may be coming. The US dollar has not traded below CAD1.3400 since February. The US dollar traded above MXN19.50 in Asia Pacific and Europe yesterday but did not trade above MXN19.48 in North America. The dollar pulled back to settle near did not sustain the gains and settled near MXN19.42. It is trading quietly though softly inside yesterday's range. Sentiment is poor and the risk is on the upside. A close above MXN19.50 could spur another run to MXN20.00. Meanwhile, the dollar gapped higher against the Brazilian real, and was greeted by sellers as it approached BRL5.60. It was driven to BRL5.5275. It entered but did not quite fill the gap, which extends to the pre-weekend high (~BRL5.5240).