Below trend growth to continue
It’s getting interesting. And it is likely to remain that way for a little while yet. China’s move to a more market orientated currency is causing volatility and uncertainty and it might take a while until there is clarity.
It’s getting interesting. And it is likely to remain that way for a little while yet. China’s move to a more market orientated currency is causing volatility and uncertainty and it might take a while until there is clarity. There are two sides to the story and until markets decide which path is the one we are taking then the direction of assets will (and has) bounce around.
Yesterday, China set the USD/CNY fix at 6.3306, around 1.6% higher than the previous day. That was higher than some expected, although some depreciation was expected. Recall that this currency is usually very stable. The Chinese currency continued to sell off sharply through the day, taking Asian currencies with it. That weighted on the AUD and regional risk assets.
Markets are concerned because it implies weakness in the Chinese economy, and depreciation of a normally stable currency could lead to corporate losses, foreign investor losses on local asset holdings and general volatility in asset prices leads to uncertainty.
This drove the decline in equity markets through the London session and lower yields, as markets worry about the Fed delaying its rate hike.
For now, as the Fed’s Dudley put it, the concerns are over the volatility in emerging markets and the weakness in economic growth that this movement is implying.
The other side to the story is that this depreciation is a loosening of monetary conditions for China and that it should boost demand, over time. That might take time to flow through and rapid depreciations can provide negative for an economy.
And that is likely behind the China currency intervention, reported in the FT and Bloomberg, to slow the depreciation of the CNY yesterday- after it had fallen around 2% in the day. The move to slow the depreciation, starting in London, still places today’s fix higher than yesterday, but slows the move.
It isn’t specifically clear if the subsequent rally in US equities, and higher yields was a result of the calming of concerns about China’s depreciation but it does perhaps assist.
The USD is now lower against the G10, with the commodity currencies of NOK, NZD and AUD outperforming. This highlights the fickle nature of this event and the ongoing uncertainty of just how this plays out. So keep watching.
The EUR was also higher and hit 1.12 against the USD at one point. This was despite Germany noting that it was not comfortable with the Greek agreement and conditions and it plans to withhold funds. But, they are ok with a bridging loan to ensure creditors are paid next week.
On the domestic front, last night RBA Assistant Governor Lowe made a speech on the property market. In this there was a highlighting of the concerns regarding house prices, the risks of rising prices and generational and distributional issues that arise. That supports the view that the RBA are likely on hold.
The intense focus on the Chinese currency market continues today. As Christy Tan notes, after yesterday’s poor industrial production data there remains pressure for more depreciation. Combine that with the drop before the close in USD/CNY, and that may limit the upside to below yesterday’s percentage move higher in the fix.
If that is the case, it may further ease the volatility in the G10 currency markets and other markets. But, if not, or if the move is at the higher end, then another bout of regional depreciation and volatility is possibly in store.
There is no local data today, so we are left obsessively monitoring China and Asian FX markets.
The Fed’s Dudley was pretty relaxed in regards to the hiking cycle – saying they are likely to achieve their goal (ie hike). Today’s retail sales adds to the information for the Fed and is expected to improve. It should be another support for the hike.
On global stock markets, the S&P 500 was +0.10%. Bond markets saw US 10-years +0.71bp to 2.15%. On commodity markets, Brent crude oil +1.16% to $49.75, gold+1.4% to $1,123, iron ore +0.2% to $56.31. AUD is at 0.738 and the range was 0.7374 to 0.7384.
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