Aussie and Chinese hit short-term highs, but then reverse
Asian FX markets were mostly stronger on Wednesday with a perfect storm of better global manufacturing numbers and hopes for Chinese stimulus boosting sentiment.
However, the positivity didn’t last long, and key markets like the Chinese yuan and Australian dollar eased back to finish flat.
Wednesday’s procession of purchasing manager indexes (PMI) saw better than expected manufacturing numbers in France, Germany, the UK and US. Notably, the US manufacturing PMI moved back above the 50 level that marks economic expansion.
(The non-manufacturing services numbers in these countries were mostly disappointing, although the US again bucked the trend with a stronger than expected number that also landed above 50.)
Earlier, markets had rallied on reports from Bloomberg that Chinese authorities were considering a CNY2tln (USD278bln) support package as Chinese shares continued to see sharp losses in Shanghai and Hong Kong.
The AUD/USD jumped to one-week highs before ending flat.
Similarly, the USD/CNH hit three-week lows before also reversing to close flat. The NZD/USD ended up 0.1% after yesterday’s NZ inflation reading was reported in line with expectations – a worrying sign for the Reserve Bank of New Zealand that could keep local interest rates higher for longer
ECB decision due
FX markets broadly expect the European Central Bank will maintain current interest rates at its meeting tonight. The ECB’s Governing Council will not likely make any other policy pronouncements.
Recently, there has been a rinse-and-repeat trend in ECBspeak, emphasizing the same clearly marked schedule. In other words, the ECB wants to hold off on easing policy until after the pay agreements for January and February – as well as the Q1 wage growth data from 2024 – to see how these would impact the underlying momentum of domestic inflationary pressures.
We believe that market pricing is too aggressive when it comes to rate reduction, both in terms of amount and timeliness.
In order to give itself more time to thoroughly evaluate the medium-term forecast for underlying inflationary pressures, we believe that the ECB is more likely to start cutting rates only in June.
The EUR/USD pair has recently broken support at the fourth quarter trend-line with next support seen at the 200-day moving average at 1.0846.
South Korea GDP key for region
In South Korea, key for regional growth, GDP growth is forecast to slow down to 0.5% q-o-q, sa in Q4 from 0.6% in Q3.
In Q4, robust export growth probably added ~0.7pp to GDP growth, while poor facility investment and consumption probably took ~0.2pp away. We project that, for the entire year, GDP growth would fall to 1.3% y-o-y in 2023 from 2.6% in 2022, which is somewhat less than the 1.4% predicted by the BOK and driven by lower consumption.
Bank of Korea Governor Rhee does not anticipate rate reduction over the next six months, and the Q4 GDP result is unlikely to influence the BOK’s policy position in the near term. That said, we expect sustained weakening in domestic demand to progressively boost market expectations of early cuts.
We are more positive on the Korean won because electronic exports are continuing to improve, which should guarantee that export recovery is on a stronger footing.
AUD, CNY end lower
Table: seven-day rolling currency trends and trading ranges
Key global risk events
Calendar: 22 – 27 January
All times AEDT
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
