Chinese remarks boost Aussie, BoJ leaves policy unchanged

Summary:

• China will not devalue CNY to make its exports more competitive

• Bank of Japan leaves policy settings unchanged

• A Brexit deal virtually agreed, May rules out the second vote

Antipodean currencies, being strongly correlated with the China’s economy, were boosted after remarks from the Chinese Prime Minister Li Keqiang saying that the country would not devalue its currency in order to make its exports more competitive amid the trade war with the United States. Let us recall that Beijing already decided to retaliate and announced tariffs on imported US goods worth $60 billion. Following the overnight comments from Chinese PM we have to now wait for an answer from the White House. Li added that “recent fluctuations in the renminbi exchange rate have been seen as an intentional measure, but that isn’t true”. Li continued as saying “One-way devaluation will do more harm than good to China’s economy. China will by no means stimulate exports by devaluing the yuan”. Let us point out the important point. When the US slaps the China’s economy with new tariffs and the yuan gets weaker, then the real impact on the world’s second largest economy is being cushioned. Having the 10% tariff rate already in place does not demand so weak renminbi but China may change its mind on this topic once the US switches to a 25% rate at the beginning of the next year unless a binding deal is hammered out until then. As a consequence of the overnight comments from Chinese PM the Australian dollar is clearly gaining ground in the morning being (along with the New Zealand dollar) the best performing major currency (+0.35%).

The Aussie is continuing to push higher being fuelled by Chinese remarks on the currency. It looks that the pair could be strengthening at least toward 0.7310. Source: xStation5

The second point of note concerns the Bank of Japan which left monetary policy settings unchanged. The bank maintained its short-term interest rate target at -0.1% as well as the 10Y JGB target around 0%. It intends to continue buying ETFs, REITs but it also signalled that the pace of purchasing will fluctuate to some extent due to economic and price developments. The decision on the yield curve control mechanism was made by 7-2 with Kataoka and Harada dissenting from the vote. Neither the Japanese yen nor the 10Y JGB responded noticeably. In turn, Asian equity indices are doing well registering decent gains across the board. The Hang Seng is adding 2.2%, the Shanghai Composite is gaining 1.6% while the Japanese NIKKEI is increasing 1.25% as of 6:53 am BST - all of these are responses to Li’s overnight remarks. On top of that, indices in Asia are also being supported by firm gains on Wall Street yesterday where all major indices were able to add more than 0.5% each.

Last but not least, according to the Daily Express’s interview with British PM Theresa May the withdrawal agreement is virtually agreed. She said that “We have the opportunity now to shape the UK and its future in a way that’s good for everyone across the whole of the country”. May also added “I’m confident we can get a good deal”. UK Prime Minister ruled out the possibility of the second vote on Brexit. In a knee-jerk move the pound jumped 20 pips or so but then it moved down anew. It is trading slightly higher against the greenback at the time of writing. Note that the US dollar is being offered again.

The pound jumped on comments delivered by PM May. The pivotal short-term supple zone has yet to be broken. It could change after inflation data later today. Source: xStation5

In the other news:

• China’s holdings of US Treasuries fell to a 6-month low in July

• New Zealand’s current account deficit widened in the second quarter to -3.3% of GDP from -3% compared to the consensus of a 2.9% deficit

• Japan’s trade deficit increased in August but the result was below expectations

• Oil prices tread water after the API report showed a 1.25 million barrels increase of inventories instead of a 2.5 million barrels draw