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09.25.24
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Market Briefing: China stimulus boost

  • China stimulus. A batch of new policy measures from China boosted risk sentiment. Equities & base metals rose. USD remains on the backfoot.

  • AUD & NZD. China stimulus coupled with the RBA's on hold decision helped the AUD touch its highest point since mid-2023. NZD also firmer.

  • AU CPI. Monthly CPI indicator out today. Electricity subsidies should push down headline inflation. But the RBA has indicated it will look through it.

It has been another positive 24hrs for risk markets with policy developments in China underpinning sentiment. To support 'animal spirits' and the economy the People’s Bank of China and financial regulators unveiled a batch of measures such as a 50bp reduction to the Reserve Requirement Ratio (which will free up liquidity), 20-50bps cuts to policy and existing mortgage rates, lowering of the minimum downpayment for buying a second home, and establishing a fund to purchase stocks and unsold houses. Time will tell whether the monetary measures will be enough to sustainably boost momentum across China’s real economy. However, in the short-term the steps have been taken well by markets.

Strong gains in China's stockmarket (CSI300 +4.3%) spilled over into European and US equities, albeit to a lesser extent (US S&P500 +0.3%). Base metal prices also rose with iron ore (+6% to US$96/tonne) and copper (+4.1%) leading the charge. By contrast, European and US bond yields declined with 2yr rates ~5bps lower on the back of softer domestic indicators that reinforced expectations for more policy easing by the ECB and US Fed. Following Monday’s weak Eurozone PMIs the German IFO also saw a large drop in the ‘Current Assessment’ reading, another signal recession risks remain in place. In the US, consumer confidence fell to a 3-month low with households more worried about the state of the labor market as a higher share are noting jobs are harder to get.

Increased odds the US Fed could follow up last week’s outsized rate cut with another 50bp reduction in November and lower US bond yields have exerted more downward pressure on the USD. EUR (now ~$1.1179) and GBP (now ~$1.3412) have edged up, with the latter touching its highest point since March 2022. USD/JPY has eased (now ~143.20) as has USD/SGD (now ~1.2840, around its lowest since October 2014). Cyclical currencies like the NZD (now ~$0.6338) and the AUD (now ~$0.6893) outperformed with the AUD hitting its highest point since July 2023 as developments in China compounded the RBA’s latest on hold decision. As our chart shows, over the past year the AUD has had a high/positive correlation with trends in Emerging Market and US equities, as well as Australia-US bond yield differentials and copper.

Looking ahead, speakers from the US Fed and the US PCE deflator (the Fed’s preferred inflation gauge, released Friday) will be in focus later this week. Another step down in the headline PCE deflator, and/or comments from Fed officials outlining the prospect of a steady stream of interest rate cuts over the next year may keep US bond yields and the USD on the backfoot, in our opinion.


Global event radar: US PCE Deflator (Fri), China PMIs (30th Sep), Japan Tankan (1st Oct), Eurozone CPI (1st Oct), US ISM (2nd Oct), US Jobs (4th Oct)


AUD corner

The AUD’s march higher has extended with favourable policy developments in China, a softer USD, and policy divergence between the RBA and other central banks supporting the currency (see above). At ~$0.6893 the AUD is near levels last traded in July 2023. The AUD has also strengthened against the EUR (+0.3% to ~0.6167, a ~2-month high), JPY (+0.6% to ~98.70), GBP (+0.3% to ~0.5140), CAD (now ~0.9260, the upper end of the range it has occupied since Q1 2023), and CNH (+0.1% to ~4.8330).

Locally, as expected the RBA kept interest rates on hold at 4.35% at yesterday’s meeting. The RBA reiterated that underlying inflation “remains too high”, getting it back to target in a reasonable timeframe is its “highest priority”, recent data “reinforced the need to remain vigilant to upside risks”, and as such the Board “is not ruling anything in or out” when it comes to policy. While RBA Governor Bullock acknowledged that a rate hike wasn’t explicitly discussed at this meeting, she also pushed back once again on expectations for rate cuts in the near-term by outlining the many differences between Australia’s economic fortunes and others.

Ultimately, the data will drive the timing of the RBA’s next move, but as things stand and as we have long predicted, the first cut looks to be a story for H1 2025 given core inflation/jobs trends, the fiscal/income support that is flowing, and its relatively lower starting point. In our opinion, the divergence between the RBA and other central banks should broaden over time as offshore counterparts continue to lower interest rates and the RBA holds steady (and eventually eases more gradually). The ongoing adjustment in interest rate differentials in Australia’s favour, coupled with upbeat risk sentiment given China’s policy push and its positive impacts on Emerging Market equities and base metal prices should be AUD supportive not just against the USD but also against currencies like the EUR, CAD, NZD, and GBP over the medium-term, in our view.

That said, in the short-term we think the AUD may face headwinds from today’s August reading of the monthly CPI indicator (11:30am AEST). Consensus is looking for headline CPI inflation to drop from 3.5%pa to 2.7%pa. However, the bulk of this should be the artificial impacts from the government’s electricity subsidies, as well as base-effects from fuel prices. While the ‘sticker shock’ of a sharp drop in headline inflation may take a bit of the heat out of the AUD we don’t expect it to last given progress on core/services inflation should be much less pronounced. Indeed, the RBA has already outlined it will look through the topline result as it is lasering in on underlying inflation momentum rather than headline CPI which it expects to “decline for a time”.

AUD event radar: AU CPI (Today), US PCE Deflator (Fri), China PMIs (30th Sep), Japan Tankan (1st Oct), Eurozone CPI (1st Oct), US ISM (2nd Oct), US Jobs (4th Oct)

AUD levels to watch (support / resistance): 0.6770, 0.6830 / 0.6930, 0.6990


Market Moves


Peter Dragicevich

Currency Strategist - APAC

peter.dragicevich@corpay.com


Upcoming Events

WEDNESDAY (25th September)

AUD CPI Inflation – Monthly (Aug) (11:30am)

USD OECD Outlook (7pm)

THURSDAY (26th September)

USD New Home Sales (Aug) (12am)

USD Fed’s Kugler Speaks (6am)

AUD Job Vacancies (Aug) (11:30am)

AUD Financial Stability Review (11:30am)

USD GDP (Q2 T) (10:30pm)

USD GDP Benchmark Revisions (10:30pm)

USD Durable Goods Orders (Aug P) (10:30pm)

USD Initial Jobless Claims (10:30pm)

USD Fed’s Collins & Kugler Speak (11:10pm)

USD Fed’s Bowman Speaks (11:15pm)

USD Fed Chair Powell Speaks (11:20pm)

USD Fed’s Williams Speaks (11:25pm)

EUR ECB President Lagarde Speaks (11:30pm)

FRIDAY (27th September)

USD Pending Home Sales (Aug) (12am)

EUR ECB’s Guindos Speaks (12:15am)

USD Fed’s Barr Speaks (12:30am)

EUR ECB’s Schnabel Speaks (2am)

USD Fed’s Kashkari Speaks (3am)

NZD Consumer Confidence (Sep) (8am)

USD Fed’s Cook Speaks (8am)

JPY Tokyo CPI Inflation (Sep) (9:30am)

EUR France CPI Inflation (Sep P) (4:45pm)

EUR Spain CPI Inflation (Sep P) (5pm)

EUR ECB’s Rehn Speaks (5:15pm)

EUR ECB’s Lane Speaks (6:15pm)

EUR Confidence Gauges (Sep) (7pm)

EUR ECB’s Cipollone Speaks (7:40pm)

EUR ECB’s Nagel Speaks (9:15pm)

CAD GDP – Monthly (July) (10:30pm)

USD PCE Deflator (Aug) (10:30pm)

USD Trade Balance (Aug) (10:30pm)

USD Fed’s Collins & Kugler Speak (11:30pm)

SATURDAY (28th September)

USD Fed’s Bowman Speaks (3:15am)

*Note, all times/dates provided are AEST

About the author

Peter Dragicevich

Peter Dragicevich

Currency Strategist - APAC

Peter analyses and forecasts global macroeconomic trends to draw out possible implications for interest rates, commodity pricing, and the FX markets for Australia and across Asia.

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