FX comment – Weak China data exacerbates risk off mode in currency market

by: Roy Teo

 

 

  • Weak China data exacerbates risk off mode
  • More monetary stimulus expected

 

 

 

 

Weak China data exacerbates risk off mode

A gauge of China manufacturing sector showed that the contraction accelerated in August. This exacerbated the current bearish sentiment in the commodities and currency markets. Though the People’s Bank of China new yuan reference rate was fixed stronger this morning relative to yesterday’s close, the onshore yuan was sold off after the disappointing data. The offshore yuan discount to the onshore rate widened as risk sentiment deteriorated. Both deliverable and non-deliverable forwards are now implying larger depreciation expectations in the yuan. In our view, the forwards market are still under-estimating the magnitude of depreciation in the yuan by the end of this year. Our year end yuan forecast against the US dollar is 6.55.

More monetary stimulus expected

The People’s Bank of China’s intervention activities in the currency market to defend the yuan has drained onshore liquidity and pushed up short term rates. Our view that the PBoC is likely to lower the benchmark rates by 25bp and the reserve requirement ratio by 50-100bps may come sooner than later after this morning’s data.