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  • China ETFs book best day in a month after PBOC vows to support weak yuan with forex reserve ratio cut

    China ETFs book best day in a month after PBOC vows to support weak yuan with forex reserve ratio cut

    U.S. exchange-traded funds that invest in Chinese stocks notched their best day in a month after China ramped up its efforts to support the country’s flagging currency as investors’ concerns over the economic weakness persist.

    The People’s Bank of China said Friday it will lower the amount of foreign-exchange deposits financial institutions are required to hold for the first time in 2023, a move seen as a bid to shore up the Chinese yuan, which has tumbled this year as the world’s second largest economy has faltered due to a property-market downturn, sluggish domestic consumption, and the ballooning local government debt pile. 

    The Invesco Golden Dragon China ETF
    PGJ,
    which tracks the American depositary shares of companies based in China, rose 3% on Friday, while the KraneShares CSI China Internet ETF
    KWEB,
    which offers exposure to Chinese software and information technology stocks, gained 3.5%. The iShares MSCI China ETF
    MCHI
    advanced nearly 2.2% and the SPDR S&P China ETF
    GXC
    surged 2%, according to FactSet data.

    The iShares MSCI China ETF and the KraneShares CSI China Internet ETF booked their biggest daily percentage advance since August 3, according to FactSet data.

    China’s central bank will cut the foreign-exchange reserve requirement ratio to 4% from 6% beginning Sept. 15. The move is expected to increase the supply of foreign currencies available in local markets, making the Chinese yuan more appealing for domestic investors.

    See: China’s central bank to cut FX reserve ratio

    Based on about $822 billion foreign-exchange deposits in July, the 200-basis-point cut in the reserve requirement ratio could release about $16 billion, which will improve the supply of the U.S. dollar onshore, and could move spot USDCNY lower, said strategists at Citigroup led by Johanna Chua, chief Asia economist.

    “In a broader picture, this can be also seen as part the current round of accelerated policy rollout which works more directly on asset markets. If the accelerated pace [of policy rollout] continues, it may help stabilize sentiment to some extent and prevent outsized bearish moves on China risk assets including the RMB FX,” they wrote in a Friday note.

    The onshore yuan
    USDCNY,

    weakened around 1.7% against the dollar in August, extending its losses for the year to nearly 5%, according to FactSet data. The offshore yuan
    USDCNH,
    -0.03%
    was trading at 7.27 per dollar Friday afternoon.

    See: Chinese Property Stocks Gain on Stimulus Measures

    Friday’s change to reserve requirement ratio came a day after Chinese authorities announced that homebuyers’ minimum down payment will be reduced to 20% for first-time home purchases, and 30% for second-home purchases nationwide, according to a joint statement from the People’s Bank of China and National Administration of Financial Regulation late Thursday.

    Currently, homebuyers in largest cities such as Beijing and Shanghai have a 30% down payment ratio for first homes, and 40% or more for second homes.

    Separately, big banks, such as Industrial & Commercial Bank of China
    601398,
    -1.08%
    and Bank of China
    601988,
    -1.07%    ,
    have said they would cut their one-year yuan deposit rate by 10 basis points to 1.55% and their two-year yuan deposit rate by 20 basis points to 1.85%. The banks also plan to cut mortgage rates to boost consumption and aid the troubled property sector.

    The broader U.S. stock market finished mostly higher on Friday as traders weighed the latest jobs report to conclude the final trading day before the Labor Day holiday weekend. The S&P 500
    SPX
    was up 0.2%, while the Dow Jones Industrial Average
    DJIA
    advanced 0.3% but the Nasdaq Composite
    COMP
    ended nearly flat.

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  • U.S. dollar defies China, Russia and Wall Street skeptics as 2023 rebound continues

    U.S. dollar defies China, Russia and Wall Street skeptics as 2023 rebound continues

    The U.S. dollar is proving its haters wrong.

    Not only is the buck defying the expectations of Wall Street strategists who had anticipated that it would weaken this year, it’s also proving once again that talk of de-dollarization has been over-hyped.

    In financial markets, a gauge of the dollar’s value against its biggest rivals is nearing its highest level in six months. The ICE U.S. Dollar Index
    DXY,
    a gauge of the dollar’s strength against the euro
    EURUSD,
    -0.01%
    and other major currencies like the Japanese yen
    USDJPY,
    -0.09%
    and British pound
    GBPUSD,
    +0.21%    ,
    traded at its highest level since early June on Friday after Federal Reserve Chairman Jerome Powell helped catapult it higher by talking up the possibility of more interest-rate hikes.

    The index was adding to those gains on Monday, trading 0.1% higher at 104.13, according to FactSet data. A break above 104.70 would put it at its highest intraday level since March 16. The index is up 0.5% since the start of the year, having erased earlier year-to-date losses over the past six weeks.

    Earlier this year, dollar weakness occurred against the backdrop of U.S. rivals like China and Russia making strides in their efforts to wean themselves off the buck.

    But despite their efforts, data released last week by SWIFT, the nexus of international interbank financial transactions, showed that the dollar has never been more popular as a means of settling international trade and transactions.

    SWIFT’s data showed that 46% of interbank payments conducted on the platform in July involved the U.S. dollar, a record high. The data also showed that the Chinese yuan’s share of international payments had ticked higher while the euro’s declined.

    As if to underscore this point, the data from SWIFT arrived late last week just as a summit hosted by the BRICS nations in Johannesburg, South Africa, was breaking up.

    Rather than being a watershed event for opponents of the U.S. dollar, as some had feared, statements from the group’s members revealed internal disagreement on the subject of a BRICS currency intended to offer an alternative to the greenback.

    What’s more, while the economic alliance announced plans to admit a spate of new member nations in its first expansion in 13 years, one notable holdout seemed to spoil the party.

    Indonesian President Joko Widodo opted to keep his country, one of the world’s most populous, with a fast-expanding economy, out of the economic alliance, at least for now.

    To be sure, as MarketWatch reported back in April, talk of de-dollarization is hardly a new phenomenon, but it has received renewed attention as China, Russia and others have redoubled efforts to try and push for countries to conduct more trade in their own currencies as opposed to the dollar.

    But Russia and China aren’t alone in their disappointment at the dollar’s resilience.

    Read more: Opinion: China is nowhere near deflation, and global investors aren’t ready for what’s coming

    A compilation of 2023 year-ahead outlooks produced by Bloomberg News back in December showed investment houses in Europe and the U.S. widely expected the buck to weaken this year, with some reasoning that the two-decade high reached by the dollar index in late September likely marked its peak for the cycle.

    The ICE index traded as high as 114.78 on Sept. 28, its highest level since May 2002, according to FactSet data. The milestone marked the peak of a torrid rally that saw the buck emerge as one of the few havens from a punishing selloff in stocks and bonds that defined global markets in 2022. But the gauge has fallen 9.3% since then.

    Now, with real yields in the U.S. pushing higher and Federal Reserve Chairman Jerome Powell hinting at the possibility of more interest-rate hikes later this year, strategists say the conditions are ideal for the U.S. dollar to climb even higher.

    “Interest-rate differentials and relative economic strength are the foundation [of dollar strength],” Matt Miskin, co-chief investment strategist for John Hancock Investment Management, said during a phone interview with MarketWatch.

    China’s struggles to revive its flagging economy have helped bolster the dollar while pushing the Chinese yuan
    USDCNY,
    -0.01%
    toward its weakest level since late last year. The offshore yuan traded at 7.29 to the dollar on Monday, near its weakest level since November.

    Read this next: Opinion: The debt supercycle that hit the U.S. and Europe has now come for China

    A weakening eurozone economy has weighed on the euro and boosted the dollar. PMI survey data released earlier this month showed Europe’s services sector weakening alongside manufacturing. GDP data released by Eurostat, Europe’s official economic statistics agency, has been tepid compared to the U.S. The latest reading on second-quarter GDP put it at 0.3%.

    Right now, the dollar will be tough to beat given the twin tailwinds created by rising real interest rates and still-robust economic growth.

    The yield on the 10-year Treasury Inflation-Protected Security note
    912828B253
    was trading north of 2.2% Friday, according to data from the St. Louis Fed. The 10-year TIPS yield hit its highest level since 2009 earlier this month when it broke north of 2%. The inflation-protected security is often cited as a proxy for U.S. “real” yields, which refers to the return bond investors receive after adjusting for inflation.

    On the growth side of the equation, the Atlanta Fed’s GDPNow forecast estimated the rate of growth for the third quarter at 5.9% according to its latest reading dated Thursday. A year ago, even the most optimistic economists on Wall Street were expecting growth of about 2%, and top Fed officials had a median projection of 1.2% growth for 2023, according to projections released in September.

    “It’s hard to beat the dollar when it is a high yielder among safe havens in a risk-off environment,” Steve Englander, head of North America macro strategy at Standard Chartered, said in comments emailed to MarketWatch.

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  • U.S. dollar could soon wipe out all of its post-pandemic gains, Soc Gen strategist warns

    U.S. dollar could soon wipe out all of its post-pandemic gains, Soc Gen strategist warns

    The slide in the U.S. dollar in the last eight months could mean that mean all of its gains in the wake of the coronavirus pandemic will soon be lost, according to Kit Juckes, a macro strategist at Société Générale who has been a long-time currency analyst.

    Juckes said in a note shared with SocGen clients and the media on Tuesday that he expects the greenback could return to its lows from December 2020, the level it fell to during the pandemic given the market is pricing in an end to interest rate rises by the Federal Reserve this year.

    “As was the case in January/February before the SVB mini crisis, the market is anticipating the peak in US rates and a further narrowing relative rates. If nothing happens to scupper those expectations (another upside surprise in US growth, or further European growth disappointment) I would expect the Dollar Index to move closer but not all the way to, the lows at the end of 2020,” he said.

    “That won’t happen in a straight line and will require further interest rate convergence between the U.S. and other major economies, however.”

    Over the past week, investors’ expectations about the outlook for where U.S. interest rates are headed have shifted. Following lower-than-expected readings last week on U.S. June inflation, as measured by the consumer price index and the producer price index, many investors expect the Fed will raise its benchmark interest rate only once more when the central bank holds its policy meeting next week.

    Read this next: U.S. stocks benefiting from ‘sense of urgency’ as investors rush into equity mutual funds

    Fed-funds futures, which are used to bet on the expected path of interest rates, are pricing in nearly a 100% probability of a hike in July, but analysts also think rate cuts could come by the Fed’s January policy meeting, where futures markets already see a nearly 40% probability of a cut, according to CME’s FedWatch tool.

    This shift in expectations has triggered a wave of dollar-bearishness across Wall Street, with many top currency analysts opining that the path of least resistance for the U.S. dollar is likely lower.

    The ICE U.S. Dollar Index
    DXY,
    +0.13%    ,
    a gauge of the dollar’s strength against a basket of major currencies, was trading modestly higher on Tuesday, up 0.1% at 99.96, but on Monday, the index touched its lowest level since mid-April 2022.

    Back in December 2020, it briefly broke below 90 to what was at the time its weakest level in more than two years.

    Read more: Why stocks could get a boost from a falling U.S. dollar

    Another important question for markets will be whether the dollar’s peak in late September 2022, when the dollar index traded just shy of 115, its highest level in more than two decades, will mark a long-term cyclical peak. As Juckes notes, the dollar has traded at a succession of higher lows since 2007.

    Another issue on Juckes’ radar: the prospect that the U.S. dollar and Chinese yuan
    USDCNY,
    +0.35%
    could weaken in tandem. Juckes said he expects the yuan to climb to 7.40 against the dollar by the end of the year, a level it hasn’t seen in roughly 15 years.

    The onshore renminbi, which incorporates the yuan’s more tightly controlled exchange rate within China, was trading at 7.18, with the dollar climbing 0.1%.

    While American consumers could see the price of imported goods rise and international travel become more expensive, a weaker dollar could also help boost U.S. equity prices, as earnings of exporters get a boost from the currency’s slide, and the chances of a global recession eases, as MarketWatch reported on Monday.

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