Talking Points

Yen Gains, Aussie and Kiwi Sink on Rising Chinese Borrowing Cost
British Pound May Rise as 3Q GDP Print Drives BOE Expectations
Euro Ought to be Worried About US Economic Data, Not an IFO Miss

The Japanese Yen rode haven-seeking capital flows higher while the sentiment-geared Australian and New Zealand Dollars faced selling pressure in overnight trade as Asian stock exchanges floundered. The MSCI Asia Pacific regional benchmark equity index fell 0.9 percent. Another jump in Chinese borrowing costs seemed to have been a particular sore spot for investors after the benchmark 7-day SHIBOR lending rate was fixed at 4.89 percent, the highest since July.

The PBOC drained a net CNY102.5 billion from the markets over the past two weeks, the most since February. The policy shift may reflect an effort to contain inflationary pressure after the headline year-on-year CPI growth rate was reported at a seven-month high of 3.1 percent two weeks ago. Traders appear concerned that the tightening may slow economic growth, hurting regional economies dependent on Chinese demand.

The Kiwi underperformed against its G10 counterparts as the impact of risk aversion was amplified by comments from RBNZ Governor Graeme Wheeler. The central bank chief bemoaned the currency’s strength and the risk of perpetuating it if interest rates were to be increased. He argued that the recent introduction of lending limits may delay in policy tightening as well as degree to which rates would rise once hikes do begin, however.

Third-quarter UK GDP figures headline the economic calendar in European hours. Expectations call for output growth to accelerate, with the economy adding 0.8 percent in the third quarter to yield the best 3-month performance since 2010. A strong print may offer a lift to the British Pound amid speculation that a more robust economy than the BOE anticipated will force a shift toward a less-accommodative posture sooner than policy policymakers anticipated.

Germany’s IFO Survey of business confidence is expected to show sentiment improved in October, with the composite Business Climate index rising to the highest level since April 2012. Euro-area economic data has cautiously deteriorated relative to economists’ forecasts over recent weeks however (according to data compiled by Citigroup). That foreshadowed yesterday’s disappointing PMI roundup and seems to open the door for a downside surprise this time around as well.

While this may introduce near-term downward pressure on the Euro, yesterday’s swift recovery after the aforementioned PMI miss suggests one data is probably not sufficient to engineer a lasting reversal downward reversal by itself. The single currency seems to owe most of its recent resilience to the unwinding of Fed QE “taper” speculation. With that in mind, upside surprises on today’s US Durable Goods and UofM Consumer Confidence measures may be far more detrimental than a miss on IFO.

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