FX Daily: Monday was riddled with ironies

CNY inconsistent with slower growth; GBP eyeing BOE hikes
Philip Wee19 Oct 2021
    Photo credit: Unsplash Photo

    CNY appreciated 0.1% after China’s GDP growth decelerated more-than-expected to 4.9% YoY in 3Q21. Consensus expected growth to slow to 5.0% from 7.9% in 2Q21. However, the CSI 300 stock market index did fall 1.2%. USD/CNY has been capped at 6.44 in the past three trading sessions; last Friday’s 6.4260 low is viewed as an immediate support level. Since June, consensus has downgraded the CNY’s end-2021 outlook from 6.40 per USD to 6.48 which is considered modest against the growth weakened by clampdowns in the private sector, the Evergrande debt crisis, a Covid-19 resurgence in some regions, power shortages and global supply chain disruptions. As of 18 October, CNY has appreciated 1.4% ytd this year, notably strong compared to the average 3.2% depreciation of the other 16 Developed Market and Emerging Asian currencies that we track. In our view, USD/CNY should be above and not below 6.5270 or its end-2020 level. 

    GBP depreciated 0.2% despite increased UK rate hike bets. On Sunday, Bank of England Governor Andrew Bailey warned that monetary policy would have to curb the high inflation expected to persist into 2022. Three BOE officials – Governor Andrew Bailey, Chief Economist Huw Pill and External Member Catherine Mann – will be speaking today. Mann is the most dovish of the three; a shift in her wait-and-see stance will be significant. Pay close attention to tomorrow’s UK CPI data. Consensus expects headline inflation to be unchanged at 3.2% YoY in September, and core inflation to be underpinned at 3.0% vs 3.1% a month earlier.

    The market has fully discounted a 15bps rate hike to 0.25% at the next BOE meeting on 4 November, followed by another 25bps hike to 0.50% on 16 December. The gilt curve flattened from a faster 14.2bps rise in the 2-year yield to 0.723% vs a 3bps rise in the 10-year to 1.136%. This morning, futures see the FTSE 100 index opening flat after the 0.4% sell-off yesterday. Overall, the market worries the BOE might have fallen behind the curve on inflation because of its concern over the UK economy. Unless it breaks sustainably above 1.3810 or its 100-day moving average, GBP might disappoint too and start giving back this month’s gains.

    S&P 500 and Nasdaq Composite rose 0.3% and 0.8% respectively despite the misses in US manufacturing data. Industrial production did not expand by 0.1% MoM in September and contracted by 1.3% MoM instead; August was revised to -0.1% from 0.4%. Similarly, capacity utilization slowed to 75.2% (vs 76.4% consensus) in September from 76.2% (revised down from 76.4%). Nonetheless, stock market futures are less confident about bucking the trend a second day. One reason for Wall Street’s resilience yesterday was the paring back of oil prices from their highs but crude could climb again. Markets have discounted two Fed hikes by the end of 2022 and returned the US 10-year treasury yield to 1.60% from 1.57%. For now, DXY is sitting tight inside a 93.7-94.2 established since last Thursday.


    Philip Wee

    Senior FX Strategist - G3 & Asia

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