- China, PBoC and Government measures inability to stimulate inflationary pressures indicates that we should see further easing
- We foresee two 25bp anticipated cuts in the benchmark rate and three cuts in RRR by the end of 1Q 2016
- We believe that current easing measures will support growth and yuan appreciation in 2016
- Europe’s political instability may derail the EU fragile growth and force ECB to extend QE and cut repo rate to -0,30%
FX trading was subdued in the Asian session due to a lack of fresh news. Perhaps the lone driver was China’s weaker-than-expected inflation, which placed slight pressure on risk-taking. Asia regional indices were soft following a sharp 1% fall in the S&P 500 overnight as worries over the Fed’s hike increase. In a speech, Fed President Rosengren indicated that due to firm US data the Fed was prepared to increase interest rates. The Nikkei and Shanghai composites were marginally higher at 0.15% and 0.14% respectfully. Yet, the rest of Asian was broadly in the red. EURUSD traded in a tight range between 1.0766 and 1.0737, while USDJPY bullish momentum carried the pair up to 123.33 from 123.05 (although demand was thin). The PBoC raised the fix by 24pip to 6.3602, sending the USDCNY to 6.39. The US 10yr yields fell slightly to 2.3401%, putting USD on a back footing against most of EM Asia. In Australia, NAB business confidence fell to 2 in October, while October’s business conditions remained unchanged at 9. Overall, trading was directionless and meaningless. With a significant lack of first tier data and drivers we anticipate further range bound trading in FX.
On the data front, China’s headline CPI inflation eased to 1.3 % y/y in October, down from 1.6% in September, against a consensus of 1.5%. The decline was largely due to a moderation in food prices. PPI deflation was flat at -5.9% y/y in October making the print the most recent in nearly four years of contraction. The inability for the PBoC and government measures to stimulate inflationary pressures indicates that we should see additional easing measures. We anticipate two 25bp cuts in the benchmark rate and three cuts in the RRR by the end of 1Q 2016. As for the yuan we are in the extreme minority in predicting appreciation in 2016. We base our bullish yuan forecast on expectations that inclusion into the IMF SDR will warrant the PBoC to create the impression of reducing the yuan’s undervaluation. Secondly, the belief that current easing measures will support growth mid-2016 is currently underestimated by investors. Elsewhere in Asia, Taiwan exports fell 11% in October indicating that regional trade continues to stagnate.
***Yann Quelenn, Market Analyst: “Japan Prime Minister Shinzo Abe is still looking at other ways to stimulate the Japanese economy. The Qualitative and Quantitative Easing approach has yet to prove its effectiveness. Inflation and growth remain subdued. The economy contracted in Q2 at 1.2% y/y and the CPI annualized CPI is stuck at 0%. Therefore, Abe is now focused on the results of his fiscal arrows, already appearing very decisive for Japan’s future. He reiterates that he will push forward to reduce the corporate tax rate below 30% (below expectations) in order to boost domestic investment. This would put Japan’s corporate tax at a level comparable to other countries. At the same time, this should also be accompanied by a consumption tax hike, the first we’ve seen since April 2014.
We continue to watch closely for any data from Japan. Its current Balance of Payment current account balance hit a surplus of 1’468bn yen ($11.9bn) in September 2015 for 15 consecutive months despite it narrowed in August. The country is still running a surplus, mostly due to the decrease in commodity prices. The USDJPY is driven by increasing U.S. rate hike expectations and by the global outlook uncertainties. The greenback should monitor the 124 yen level.”***
Weakness in Euro area rates and equities continue on mounting worries over Greece, Portugal and Spain. Yesterday’s dispute between Athens and creditors will delay the disbursement of Greece next €2.15bn aid tranche. In Spain, Catalan separatist lawmakers approved a resolution that builds a foundation for separation from the rest of Spain. While in Portugal, Socialist Party with the Communist Party and the radical Left Bloc left-wing parties approved a strategy to expel PM Coelho’s administration. Portugal’s yield curves continue to steepen with 10-years yields rising 15bps. We suspect that political instability and its possibility to derail Europe’s fragile growth is likely to force the ECB into action. Overall, we expect the ECB to extend the asset purchased program and cut the deposit rate 10bpt to -0.30%.
Today traders should expect: French and Italian industrial production, minutes from the October Riksbank meeting, Norwegian CPI inflation, Swiss unemployment rate and hear from Chicago Fed President Evans.