China’s Yuan Advances as Leaders Commit to Policy Support; Euro and Pound Stabilize
China’s currency, the yuan, has strengthened following a pledge from the country’s top leaders to provide increased policy support for the struggling economy. Meanwhile, the euro and pound have steadied after a period of decline as investors await major central bank meetings.
The yuan saw gains of over 0.5% in both the onshore and offshore markets, as investors responded positively to comments made during the closely observed Politburo meeting. However, many investors are still seeking more specific details regarding additional stimulus measures.
At present, the offshore yuan is trading at 7.1444 per dollar, while the onshore market has it at 7.1454 per dollar. Chinese stocks, particularly those in the property sector, have also experienced a surge.
Tommy Xie, head of Greater China research at OCBC, commented on the matter, stating, Overall, the sheer range of issues that the meeting touched upon goes beyond what the markets had anticipated. While the sweeping breadth of the topics was appreciated, the execution and depth of these policies will be the real test.
In addition to leadership support, the yuan was propped up by major state-owned banks in China selling US dollars to purchase yuan in both onshore and offshore spot markets on Tuesday, as reported by sources to Reuters.
Riding on the positive sentiment surrounding China, the Australian dollar, often viewed as a liquid proxy for the yuan, has risen by 0.4% to $0.6767.
In European markets, the pound has gained 0.22% against the dollar, reaching $1.2854. This marks the first day of gains for the pound after a continuous seven-session decline, the longest such streak since March 2020.
The euro has also experienced a slight increase, rising by 0.12% to $1.1076. This follows a dip to a two-week low of $1.1059 earlier in the session, which came as a result of a survey indicating a more significant contraction in euro zone business activity than anticipated for July.
This contraction has caused traders to adjust their expectations for future rate hikes by the European Central Bank (ECB) later this year. A deviation from a 25-basis-point increase at Thursday’s meeting would be quite surprising.
The Federal Reserve is also holding a meeting this week, and it is widely anticipated that they will raise rates by 25 bps. The majority of economists polled by Reuters believe this will be the final increase in the current tightening cycle for the central bank.
Guillermo Felices, global investment strategist at PGIM Fixed Income, highlighted the relevance of the Fed meeting, stating, While the Fed meeting (in July) is likely to be uncontroversial in terms of the decision on interest rates, the Fed’s statement and the press conference will be extremely relevant for markets.
In Asia, the yen is still under significant pressure at 141.30 per dollar, struggling to recover from significant losses due to a Reuters report suggesting that the Bank of Japan (BOJ) is leaning towards maintaining its yield control policy at this week’s policy meeting.
Aninda Mitra, head of Asia macro and investment strategy at BNY Mellon Investment Management, remarked on the situation, saying, (BOJ) Governor Ueda has held his cards close to his chest, seemingly unpersuaded by the recent run-up in Japanese prices and especially workers’ wages, and he has dropped few hints about an impending YCC (yield curve control) tweak.
Overall, as global markets anticipate central bank meetings, the yuan’s advance, along with the stabilization of the euro and pound, is seen as positive news. However, the focus remains on the execution and depth of the pledged policies in China and the decisions of central banks worldwide.
