January 23, 2024

“News of potential stimulus in China has pulled European and Asian FX up this morning against the dollar, with sterling in particular boosted by positive news about the UK’s public finances which may leave room for tax cuts this quarter. The macroeconomic calendar kicks into high gear tomorrow with the PMIs and a central bank decision in Canada.”

Sam Cornford – Head of Trading

Main Headlines

Chinese authorities are contemplating measures to stabilise its sliding stock market, intending to mobilise around 2 trillion yuan ($279 billion), primarily from offshore accounts of state-owned enterprises. The funds would be utilised to establish a stabilisation fund, with the intention of purchasing shares onshore through the Hong Kong exchange link. However, investors have responded with scepticism to these proposed measures. While the S&P 500 is near a record high, Chinese stocks are languishing at a five-year low.

UK Chancellor Jeremy Hunt received positive news this morning as he mulls potential tax cuts ahead of an expected national election later this year. Data revealed more flexibility in his March budget plan than previously anticipated, with the UK posting a smaller-than-expected budget deficit of £7.77 billion ($9.9 billion) in December, less than half the figure from a year earlier. Borrowing in the first nine months of the financial year reached £119.1 billion, £11.1 billion higher than the same period a year earlier but nearly £5 billion less than the budget watchdog’s forecast.

GBP

A broad boost to risk appetite and positive public borrowing data has dragged sterling up 0.2% against the dollar in this morning’s session. The prospect of headroom for tax cuts in Hunt’s March budget will boost sentiment about the UK economic outlook and potentially increase the likelihood that inflation stays slightly more persistent. Meanwhile, an announcement overnight that Chinese authorities are mulling a $279bn stock market rescue package has dragged up Asian and risk-sensitive FX this morning and weighed on the safe-haven dollar. With the calendar quiet until tomorrow, today is something of a calm-before-the-storm situation, before markets are hit with a barrage of PMIs data and a stream of central bank decisions.

EUR

Boosted risk appetite has supported the euro this morning following the news out of China. Data today is limited to Eurostat’s consumer confidence survey and an ECB lending survey, leaving investors to gear up for a string of PMI activity indicators tomorrow morning – which are set to improve slightly – and the ECB’s press conference the day after. A sparse calendar worldwide will leave EUR/USD’s direction in the hands of investor mood and whether the boost can be sustained. A clearer direction is likely to be found in the second half of the week.

USD

The dollar index edged lower overnight on a broad Asia-driven rally in risk assets that have dampened the greenback’s safety appeal. The only domestic release for investors to digest today is the Richmond Manufacturing Index, which may point to some clues about the results of the flash PMIs tomorrow. Across the Pacific, the Bank of Japan’s decision to maintain its monetary stimulus led USD/JPY modestly downwards after comments from Governor Ueda proved to be marginally less dovish than expected – the pair has rallied this month, as analysts have pushed back their expectations for when the central bank exits negative interest rates until April. The yen has weakened almost 5% overall against the dollar year-to-date following an overexcited bull run last month.

Markets

The S&P 500 notched a fresh record high yesterday and Asian shares mostly rose as mainland Chinese stocks joined a broader rally following news of a fresh market rescue package. Japan’s Nikkei index hit another 34-year high as the Bank of Japan stood pat on its negative interest rate policy.

Main Economic Events (All Times CET)

4:09am.: Bank of Japan Policy Decision
8:00am.: UK Public Sector Net Borrowing
4:00pm.: Eurozone Consumer Confidence
4:00pm.: US Richmond Manufacturing Index
10:45pm.: New Zealand CPI
11:00pm.: Australian Flash PMIs

Corporate Events

Earnings include Visa, Johnson & Johnson, Netflix, Verizon, and Procter & Gamble.

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