Dollar extends gains while investors parse China's stimulus plans

British Pound

Reuters: The pound was pinned around a one month low on the dollar on Friday, getting little support from data that showed Britain's economy returned to growth in August. Sterling was last flat on the day on the dollar at $1.3069, just off the $1.3011 hit Thursday, its lowest since mid Sept. It was also flat on the euro, at 83.70 pence to the common currency. Economic output rose by 0.2% in monthly terms in August, according to figures from the Office for National Statistics - in line with expectations in a Reuters poll of economists - and a return to growth after two consecutive months of stagnation.

That provides some relief to finance minister Rachel Reeves ahead of the new Labour government's first budget later this month, though still shows a slowdown compared to the start of the year. But the pound was little moved. "The data didn't change the big picture a great deal, it provides confirmation that the UK economy is slowing in the second half of this year, but that's understandable, I don't think anyone thought that the strong pace of growth in the first half of the year was sustainable," said Lee Hardman, senior FX strategist at MUFG.

"For the Bank of England, next week is much more important with the latest inflation and labour market reports due, which will be important in terms of determining the kind of messaging we get for the Bank of England ahead of their next meeting in November." The pound for much of this year had been supported by expectations that the Bank of England will cut rates more slowly than peers such as the Federal Reserve and European Central Bank. But this has been changing, and much of the currency's decline in the past month against the dollar has been down to shifts in those relative expectations.

Markets have reduced the amount of Fed easing they expect while, in contrast, BoE governor Andrew Bailey said last week the central bank could become 'more aggressive' on rate cuts if inflation pressures continue to weaken. U.S. CPI and jobless claims data Thursday did little, in combination, to shift market pricing for the Fed, and they continue to see two 25 bp rate cuts at each of its remaining meetings. Markets see at least one 25 bp BoE cut across its two remaining meetings and around a 40% chance of a second.

US Dollar

Reuters: The dollar extended its gains in early Monday trades in Asia as a holiday in Japan sapped liquidity, leaving China's somewhat disappointing weekend stimulus announcements the focus of market attention. The euro was down 0.13% at $1.0922 and the pound nearly 0.2% lower at $1.3043. The dollar was flat on the Japanese yen at 149.20. The dollar index was at 103.10, up a touch and closing in on last week's peak, its highest since mid-August, on the back of traders reducing bets on further jumbo rate cuts by the Federal Reserve at its remaining meetings this year.

Ahead of the onshore market opening, the yuan was down more than 0.2% against the dollar, while the Aussie, whose fortunes are closely tied to China, was down 0.16% at $0.67385. China said on Saturday it will "significantly increase" government debt issuance to offer subsidies to people with low incomes, support the property market and replenish state banks' capital as it pushes to revive sputtering economic growth. Without providing details on the size of the fiscal stimulus being prepared, Finance Minister Lan Foan told a press conference there will be more "counter-cyclical measures" this year.

"Markets are likely disappointed that China's Finance Ministry did not unveil concrete additional stimulus," said Richard Franulovich, head of FX strategy at Westpac, in a note. "The weekend press briefing mostly just reinforces our existing expectations that China's policy pivot is worth a one-time 3-4 cents lift in the Australian dollar's equilibrium, of which about half has already been priced in." Further moves are unlikely, he said, until there is progress toward addressing excess housing, local government debt and demographic challenges as China's population ages.

The yuan is down 0.9% against the dollar since Sept. 24, when the People's Bank of China kicked off China's most aggressive stimulus measures since the pandemic. The CSI300 Index has broken records for daily moves and is up 16% overall. But stocks have grown wobbly in recent sessions as initial enthusiasm about economic stimulus gave way to concerns about whether the policy support would be big enough to revive growth. "More time may be needed for more thought-out and targeted measures," said Christopher Wong, currency strategist at OCBC in Singapore. "But those measures also need to come fast as markets are eagerly waiting for them. Over expectations vs under-delivery would result in disappointment"

Currency moves in major markets were tepid last week. The yen and euro both fell around 0.3% each, sterling shed 0.4% and the dollar index climbed 0.4%. U.S. Treasuries are unlikely to provide much of a lead on Monday, since both Japan and the U.S. markets are closed for holidays. Last week's U.S. data showing slightly hotter-than-expected consumer inflation but also higher weekly jobless claims have left intact expectations for the Fed to cut rates by 25 basis points in November and December.

Traders next have on their radar Thursday's retail sales and jobless claims data in the United States. Fed Governor Christopher Waller speaks later on Monday. He is one of the voices who supports a larger rate cut because he is now worried the pace of price increases is undershooting the Fed's target. The New Zealand dollar was down 0.15% at $0.61, following last week's 0.8% drop after the central bank slashed rates by a half point and hinted at further cuts to come. Singapore's central bank kept its currency-based monetary policy steady on Monday.

South African Rand

Reuters: South Africa's rand gained against the dollar on Friday after U.S. data this week helped sustain expectations for an interest rate cut by the Federal Reserve next month. At 1616 GMT, the rand traded at 17.39 against the dollar, about 0.8% firmer than its previous close. The dollar index was last down about 0.05% against a basket of currencies. Data from the world's biggest economy this week kept intact bets of another rate cut when the Fed meets in November. The U.S. producer price index for final demand was unchanged last month, data showed on Friday, a day after other data showed jobless claims rose while consumer inflation was slightly higher than expected in September.

The local currency has tracked the dollar and U.S. economic data points this week in the absence of major domestic events. On the stock market, the blue-chip Top-40 index closed about 0.8% up. South Africa's benchmark 2030 government bond was slightly weaker, with the yield up 1.5 basis points to 9.155%.

Global Markets

Reuters: Asian stocks swung between gain and loss on Monday as investors struggled to reach a consensus view on China's economic stimulus promises made over the weekend which, though broad, were light on specifics. Minister of Finance Lan Foan at a closely watched news conference on Saturday pledged to "significantly increase" debt, but left investors guessing on the overall size of the stimulus, a detail needed to gauge the longevity of a stock market rally. "Most onshore investors believe Beijing's decision to restructure local government and housing debt using central government funds is more significant than many foreign investors believe," said analysts at Morgan Stanley in a client note.

The divergence was apparent on Monday, after shares in Hong Kong opened slightly lower and were choppy in early trade, contrasting sharply with their mainland Chinese peers which got off to a strong start. The Hang Seng Index last traded a marginal 0.01% lower, while the CSI300 blue-chip index rose 1.6%. Property stocks onshore and offshore, however, eked out solid gain as investors bet the latest stimulus measures could aid China's beleaguered property sector. The Hang Seng Mainland Properties Index tab advanced 2.2%, while the CSI300 Real Estate Index jumped 3.7%.

The mixed picture left MSCI's broadest index of Asia-Pacific shares outside Japan down 0.11%, after having fallen 1.7% last week as the Chinese stocks rally hit pause. Trading in Asia was thinned on Monday with Japan out for a holiday. U.S. stock futures similarly edged lower, with S&P 500 futures losing 0.1% while Nasdaq futures fell 0.25%. EUROSTOXX 50 futures and FTSE futures eased 0.08% and 0.05%, respectively. Also in a blow to China's growth outlook, consumer inflation unexpectedly eased in September while producer price deflation deepened, data on Sunday showed.

Reflecting the lingering concerns over the Chinese economy, the onshore yuan slipped 0.11% to 7.0743 per U.S. dollar, while its offshore counterpart fell by a greater extent of 0.2% to 7.0828 per dollar. Oil prices also fell by more than $1 a barrel on Monday on worries about waning Chinese demand for the commodity. Brent crude futures were last down 1.32% at $78.00 a barrel, while U.S. West Texas Intermediate crude futures fell 1.3% to $74.58 per barrel. Still, the latest raft of stimulus pledges prompted analysts at Goldman Sachs to raise their real gross domestic product forecast for China this year to 4.9% from 4.7%.

"While we have upgraded our cyclical view on the back of the more forceful and coordinated China stimulus, our structural view on China's growth has not changed," the analysts wrote in a client note. "The '3D' challenges - deteriorating demographics, a multi-year debt deleveraging trend, and the global supply chain de-risking push - are unlikely to be reversed by the latest round of policy easing." China's third-quarter GDP data is due on Friday. Elsewhere, movement in currencies was largely subdued, with the U.S. dollar continuing to draw support from reduced bets of an outsized Federal Reserve interest rate cut next month.

Against a basket of currencies, the greenback hovered near a seven-week high at 103.03. Traders have priced out any chance of a 50-basis-point rate cut from the Fed in November after data last week showed consumer prices rose slightly more than expected in September and recent economic releases have also underscored strength in the labour market. Sterling fell 0.13% to $1.3050 while the euro eased 0.11% to $1.0923. A reading on UK inflation is due later this week, as is an interest rate decision from the European Central Bank.

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