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Weaker Chinese economic data and surprise PBoC rate cut drive a weaker yuan


Bad economic news out of China has driven a weaker yuan and the NZD and AUD down 1.4%, with losses sustained after bad economic news out of the US overnight. Oil prices and global rates have also fallen, but equity investors have adopted the bad news is good news playbook and this sees some modest gains.To get more news about GemForex宝石外汇, you can visit wikifx.com official website.

The new week began on an ominous note with a surprise rate cut from the PBoC, trimming 10bps off the medium-term lending facility rate to 2.75%. This easing of policy by China continued to go against the global trend of higher rates. But we saw the move as more symbolic than meaningful, as easier monetary policy is proving to have little effect, with the country caught in a classic liquidity trap, with no shortage of liquidity in the banking system and interbank rates consistently trading below the policy rate. In fact, the PBoC also withdrew a net 200 billion yuan from the banking system, by only partially rolling over 600 billion yuan of maturing loans. A lack of demand for credit than supply of credit reflects the significant property downturn and lack of confidence in the economic outlook under the zero-COVID policy.
Soon after, the reason for the symbolic cut in rates became obvious, with China monthly activity data for July all much weaker than expected across the key industrial production, retail sales and investment indicators. There were signs of growth momentum fading after some earlier pick-up from easing lockdown restrictions, but ongoing weakness in the property market, lately not helped by mortgage boycotts, continues to remain a significant drag on the economy. Cautious spending behaviour alongside rolling COVID-related lockdowns across various regions aren’t helping either.

The yuan came under pressure, with USD/CNH on a rising trajectory and further gains overnight taking the move above 1%, breaking up through 6.81 in the last couple of hours. We’ve often noted the high correlation between the yuan and the NZD and AUD, so it is no surprise to see those currencies under pressure given the backdrop, both down 1.4% since last week’s close. Of course, both currencies made extraordinary gains last week following the weak US CPI print and higher risk appetite, but poor global macro news has been our thesis for a weaker trajectory heading into year end. The NZD currently trades at 0.6360 and the AUD is at 0.7020, not that far above the overnight lows.

Supporting the gloomy economic backdrop story, some second-tier US data shocked to the downside. The NAHB housing market index continued to plough new depths, again falling by more than expected to 49 (exp. 55), with the commentary around the release noting “tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession”. The Empire Manufacturing index, a measure of activity in New York, was expected to nudge down 6 pts to 5, but plunged to minus 31.1 in one of its largest falls in history, driven by weaker new orders and shipments. One positive of the survey was a small lift in the 6-months outlook index, but this was off a multi-decade low. While this survey can be volatile, it speaks volumes about the uncertain economic outlook.

Oil prices are down about 3% with Brent Crude trading with a USD95 handle. The move has been put down to the weaker China data, seen to crimp the demand outlook, while supply from Iran might ease some pressure on the oil market, with the country’s Foreign Minister signalling a nuclear deal agreement could be reached in the next few days “if the US shows a realistic approach and flexibility”.
The bad economic news has driven global rates lower, with key European 10-year rates down in the order of 8-9bps while US 2 and 10-year rates are down about 4bps. The news hasn’t pushed equity markets off their recently rising trend, perhaps encouraged by the lower rates backdrop on a view – not necessarily correct – that the tightening cycle might not need to be so aggressive. S&P500 futures were heading lower until the US equity market actually opened, and it was onwards and upwards from there, the futures up over 1% from their low and the index itself currently up 0.4%.

We’ve noted the much weaker yuan, NZD and AUD but other key currencies have also been hit against the backdrop of a stronger USD, and JPY performing well against a backdrop of lower global rates. EUR is down about 1% to 1.0160. Of note, European gas futures keep on trending higher, with the Dutch TTF gas benchmark up 7% through EUR220/Mwh, adding to the economic pain ahead. GBP is down 0.7% to 1.2055.

Yesterday, the domestic rates market showed a flattening bias, driven by global forces, with 10-year swap down 4bps to 3.68% and no change in the 2-year swap rate at 3.96%. NZGB rates showed a similar move. NZ’s performance of services index fell to a 5-month low of 51.2 in July, below the long-run average of 53.6. Combining the data with the PMI, the early signals for Q3 suggest slower growth momentum following the Q2 bounce coming out of Omicron-related restrictions.