GBP, AUD, JPY, and CNY under focus
While the Bank of England left the policy stance unchanged and cautioned that inflation could soften if political uncertainty persists, the news was quickly dwarfed by positive Brexit comments from EC President Juncker. He thinks a Brexit deal can be reached by Oct 31, and further stated that he was doing everything to prevent a no-deal Brexit. GBP/USD jumped above 1.25, with markets keenly anticipating the meeting between Irish PM Varadkar and UK PM Johnson next week.
However, GBP’s relief was not reflected across risk currencies broadly. AUD/USD again broke below 0.68 after labour market data shows an increase in the unemployment rate, contrary to RBA expectations for a gradual decline over time. The Bank could weigh further cuts to its policy rate, with underlying private sector momentum remaining weak. Meanwhile, the JPY also firmed below 108 after the BoJ left policy settings unchanged, even with Governor Kuroda stating that he could lean towards easing if inflation loses momentum.
Chinese yuan: downside risk remains
The Chinese yuan have held a firm tone in the past few days as market cheered progress in China-US trade negotiation. Beijing exempted duties on some US imports last week, while the Trump administration delayed a tariff hike in a rapid exchange of goodwill gestures. Both sides have agreed to resume trade talks in October. The onshore yuan initially climbed against trade headlines to 7.0673 per dollar on Monday, its strongest since 21 August. It later trimmed gains to 7.0879 Wednesday, still up 1.2% from its 11-year low reached earlier this month. We are however cautious. It remains unclear whether the talks would produce a breakthrough and defuse tensions between the two countries.
Adding to pressure was data showing the slowdown in China’s economy deepened in August, with industrial production growing at its slowest in 17 years. Recent signs of front-loading suggest that exports could weaken should the proposed tariffs be levied in December. To be sure, the People’s Bank of China has the incentive to keep the yuan steady before the October meeting. Yet the breach of 7 since early-August signals a shift to a more flexible exchange rate to absorb the tariff shock. It also opens up room for maneuvering on its monetary policy. We expect the PBoC to lower the loan prime rate and cut reserve requirement ratio by another 50-100bps in Q4. Banks’ reluctance to lend will however drive some liquidity into bonds. That may also add depreciation pressure on the yuan.
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