It was another quiet day on the headline front, but it was all about investors jockeying for position ahead of what is expected to be a soft US CPI due Thursday US time.
As European growth starts to warm up, markets are pricing out a technical recession as the region's activity data has improved markedly in recent weeks, and incoming data has remained resilient.
China's earlier-than-expected reopening should provide a growth boost to the region. Beyond boosting growth, it should lift EU equity markets as Asia Pacific is a crucial importer of STOXX 600 constituents.
The prospect of the Fed U-turn continues to put a soft bid under the Euro this week. And assuming no upside surprises on the inflation front, currency traders' tunnel vision on China reopening growth impulses should be a key driver of commodity currency upside.
The growth prospects outside the US have markedly improved, presenting potentially more attractive alternatives to USD assets. And incremental news outside of the US has been growing more positive, leading to upgrades in European and Asian equity market forecasts. If some concerns weighing on foreign investor flows start to unwind, primarily around non-US recession risk, we could see scope for a more significant Dollar downside than is currently in the price.
Recent surveys suggest that the first wave has already peaked in China. And though spot economics remain poor, the market has discounted the near-term economic headwinds as hope springs eternal once the Winter Covid waves pass.
On the RMB, the repatriation of offshore US dollar holding is ongoing. And a much higher rate of FX conversions by exporters than typically noted adds enthusiasm to the speculative buying binge. Any Yuan weakness in this environment will be perceived as an opportunity to buy.
Overall, RMB appreciation should continue. However, I suspect the market will grow wary of chasing the Yuan significantly beyond 6.7, at least in the short term, as the authorities could start leaning against the rally, particularly given the RMB's ongoing strength in the CFETS basket amid a weaker export backdrop.
Comments