CNY: TD Securities: Breaking Lower Despite Pushback
TD Securities “now expect USD/CNY to break CNY7.00 over the coming weeks as pressure on the economy builds, ending the year around CNY7.10 (previously CNY6.80).”
- “The growth outlook will undermine support for the currency. Weakening activity indicators and limited stimulus led us to downgrade our GDP forecast to 2.9% this year.”
- “We think China will want to allow for some trade-weighted depreciation of the CNY CFETS index to maintain exports competitiveness.”
- “We think China's broad basic balance position will also weaken further in the months ahead, reducing the underlying support for the CNY.”
- “There are growing signs including from recent CNY fixings that the PBoC is uncomfortable with the pace of CNY depreciation.”
- “Pushback from PBoC is likely aimed at sending a signal to the market but in itself it is unlikely to stem CNY weakness.”
- “Even if the USD turns lower we think China will limit the pace of any CNY appreciation, thus resulting in CNY depreciation on a trade-weighted basis.”
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AUSSIE BONDS: Futures Ticking Lower
Aussie bond futures have declined on the back of a modest cheapening in U.S. Tsys, with participants reacting to previously-flagged Fedspeak from Minneapolis Fed Pres Kashkari, while e-minis have paused their earlier downtick (inspired earlier by the weak Chinese PMI print, as well as headlines surrounding U.S. House Speaker Pelosi’s Asian tour). YM and XM are -4.5 and -5.5, respectively, with the former operating around session lows after failing to breach its overnight low. Bills run 3 to 7 ticks cheaper through the reds, bear flattening.
- Elsewhere, Shanghai has reported no COVID cases for Sunday (vs. five for Saturday), likely helping to counter some worry re: soft Chinese economic data over the weekend. Note that Chinese Caixin m’fing PMI is due later today.
- Up next, Melbourne Institute Inflation is due at the top of the hour, while ANZ Job advertisements will cross in ~45 mins time.
USD: Goldman: Still A Hard Bar To Beat
Goldman Sachs note that “the FOMC made an important policy change by modifying its policy guidance and broadening the criteria for slowing the pace of future rate hikes to more explicitly include the activity outlook. This was both natural and necessary at some point, and should mean a notable shift for how the market prices the reaction function into the autumn. The market correctly assessed this as a dovish outcome under the current circumstances, in our view. But the decision has to be viewed in conjunction with the latest wage and inflation data, which will make it difficult for the market to push too hard on the dovish narrative. Overall, we expect that the broader FOMC criteria will make for a less disruptive Dollar rally (and some relief to EM currencies after a tough couple of months), but not enough to turn the tide on the greenback. Fed tightening will still make the Dollar a hard bar to beat, especially with rising recession risks in Europe.”
JGBS: Twist Steepening, Futures Marginally Cheaper
The weakness observed in broader core global FI markets at the start of the week has applied modest pressure to JGB futures. Still, futures have stuck to a relatively narrow range since the Tokyo re-open, showing through overnight session lows, but bears have struggled to force a meaningful foray lower, with the contract last off worst levels, dealing -14 on the day. Cash JGBs run 1bp richer to 1bp cheaper on the day, with 2s the only point on the wider curve to trade richer as the curve twist steepens. Wider market gyrations have dominated lower tier domestic news flow thus far.
