FX Daily: RMB rebounds as offshore liquidity tightens
The RMB has rebounded in both onshore and offshore markets, with USD/CNH easing below 7.30. Sentiment is turning less negative after a recovery in Chinese aggregate financing for Aug, helped by recent mortgage easing measures. The PBOC had also warned on Monday that it could act against one-sided speculation against the RMB. Indeed, offshore RMB liquidity is tightening sharply this week, with forward implied yields rising across the curve after the PBOC announced that it will issue CNY15bn of bills in HK. Window guidance to state banks to restrict liquidity could exacerbate a seasonal tightening of offshore RMB liquidity ahead of quarter-end and the week-long October holidays, helping to ward off RMB shorts. We maintain that RMB depreciation is not aligned with policy intentions and expect the RMB to stabilize given Chinese measures, though some adjustment in USD/CNY could happen if the USD strengthens again.
The JPY had given up much of its earlier gains, with USD/JPY rebounding to mid-147 levels. Expectations remain for policy easing to continue in the short-term, and so carry trades funded by JPY have continued. Still, Governor Ueda is quite clear that negative rates could be unwound if wage growth is to pick up. Swap markets have fully priced in a 10bps hike by Jan 2024, and this will return the short-term rate back to 0% from -0.1% currently. Gradual policy normalization may be on the cards next year, with JPY volatility also now becoming a factor in BOJ’s considerations.
US CPI did not pose much surprise for the USD, with DXY remaining little changed under 105. While core inflation is a tad stronger than expected at 0.3% m/m for Aug (Jul: 0.2%), the re-acceleration is due to a single category, transportation services, and does not imply broader inflation pressures.
Going forward, the DXY will be driven by the EUR with the outcome of the ECB meeting today in the balance. Analysts are evenly split between a hold and a 25bps hike, while markets are pricing in a 66% chance of a hike. Growth concerns have flared up even as inflation has proven hard to quell in the Eurozone. The German government is reportedly looking to downgrade its forecast of 0.4% growth this year to a contraction of 0.3%, following a similar downgrade by the European Commission released on Monday. The EC has also downgraded its 2023 Euro Area growth forecast to 0.8%, compared to 1.1% earlier. The slowdown in China, and real wage losses, have all weighed on demand.
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