The Japanese yen has declined against major global currencies, as China’s latest aggressive economic stimulus package has reignited risk sentiment among investors. Meanwhile, the yuan surged to its highest level in 16 months, bolstered by China’s efforts to stabilize its economy.
Global markets reacted as Beijing’s moves caused the US dollar to remain still near a 14-month low but recovered versus the yen, which remains more volatile. Meanwhile, the dollar went up 0.78 percent to 144.34 yen while the euro also rallied 0.87 percent against the Japanese currency. Also, the British pound and Australian dollar gained more than half a percentage point each.
Impact of China Stimulus Package on Global Markets
The interest rate cuts and stock market support under China’s sweeping stimulus package have substantially come as a source of much-needed confidence to global investors. Nordea Bank Chief Analyst Niels Christensen says that Chinese and Asian markets have had a positively rippling effect from the stimulus measures in the report. Riskier assets are being sought by more investors, who borrow in yen to take advantage given by the low interest rates in Japan.
In addition, the stimulus measures of the Chinese government are also for the euro’s benefit because a hike in demand by China would be positive for Germany and the rest of Europe.
“As foreign exchange strategist Jane Foley from Rabobank has shown, even stale German economic data and worrisome budget deficits of France cannot put an end to the euro’s upward march against the dollar.
Currency Movements and Sentiment
The euro gained 0.06 percent and traded at $1.1187, near its 13-month high of $1.1201 hit in August. Both the Australian and New Zealand dollars also surged before correcting. Australia’s dollar reached a high since February 2023 of $0.6908 before easing back to $0.68715 after data showed domestic consumer prices have slowed. The New Zealand dollar reached its nine-month high at $0.63555 before easing back to $0.6314.
According to Christopher Wong, OCBC’s Currency Strategist, China’s equity markets will guide one to forecast the future performance of the yuan because it is said to work more or less as a gauge of the overall sentiment of investors. Yesterday, the onshore yuan advanced to hit a 16-month high of 7.0012 per dollar, while its offshore counterpart briefly broke a significant psychological barrier when hitting a peak of 6.9952 per dollar.
Response to International Policies of China’s Economy
This move by China, which has continuously supported its financial markets, has had a ripple effect in other parts of the globe. The country’s central bank, PBOC, said it will cut the interest rate on its medium-term lending to banks from 2.30% to 2.00%. This move is part of a series of measures being taken for improvement in growth that in recent months have faced mounting pressure.
Ripples from China’s policies can also be felt in Europe. Britain’s pound dropped to 0.3% as it closed at $1.3369 after earlier hitting an all-time high since March 2022 at one point during the session. Investors now focus on Britain’s budget, which can include higher taxes when revealed, despite less aggressive expectations of rate cuts from the Bank of England, unlike the Federal Reserve.
U.S. Dollar and Other Currencies
The dollar index, which measures the currency against a basket of peers, rose 0.2% to 100.45 after it posted its biggest one-day decline in a month earlier in the week. However, the dollar continues on its back foot, as market participants increasingly factor in the prospect of a 50-basis-point rate cut at the Fed’s next meeting. Based on the CME FedWatch tool, the probability of this cut has risen to 59.1% from 37% a week ago.
But the dovish tone put out by Sweden’s central bank, the Riksbank, in lowering its key interest rate by 25 basis points to 3.25% from 3.50% did not move the Swedish krona much. According to ING analysts, growth prospects ahead are of more importance at present than domestic interest rates.
Outlook
The world’s currency markets are still very sensitive to economic changes, especially the changes in the developments of China’s policies. In this sense, as investors continue to reassess the effects of China’s stimulus packages, the yen is going to be edged down further with more tolerable risky investments, and the yuan will gain strength in the light of the economy in China appearing to get better. On that premise, central banks all over the globe are likely to adapt to the changing market dynamics to shift their approach.
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