China returns Monday from a week-long holiday during which emerging markets got pummeled as U.S. Treasury yields climbed to a seven-year high.
The People’s Bank of China announced over the weekend it would cut the amount of cash lenders must hold as reserves for the fourth time this year as part of efforts to bolster the economy amid the continuing trade dispute with the U.S. The offshore yuan weakened past 6.90 per dollar last week. Data on Sunday showed the nation’s foreign-currency holdings fell in September.
Events in Brazil and Turkey are also likely to keep traders busy this week. The real’s implied volatility was at a four-year high Friday as Brazilians prepared to vote in Sunday’s presidential election first round. Turkey is due to publish current-account data Thursday, with many economists forecasting a record surplus.
Treasury 10-year yields rose the most since February last week as stronger U.S. data added to the case for reduced stimulus measures from the Federal Reserve. Emerging-market stocks tumbled 4.5 percent in the five days through Friday, their worst performance since February, while currencies and domestic bonds dropped the most since August.
“The dollar’s rally will likely continue,” as the Fed will likely extend its policy of gradual interest-rate increases at least through the end of 2019, said Richard Segal, a senior analyst at Manulife Asset Management Ltd. in London. “That and the U.S. bond market reaction will weigh on emerging markets, especially the local-currency market.”
All Eyes on China
The central bank lowered the required reserve ratio for some lenders by 1 percentage point, effective Oct. 15
The cut will release a total of 1.2 trillion yuan ($175 billion), of which 450 billion yuan is to be used to pay maturing medium-term funding facilities
It gives the market a stronger easing signal and can support sentiment, which has been negative on China and emerging markets in the past few days, said Wang Tao, head of China economic research at UBS Group AG in Hong Kong
“Chinese policymakers appear to favor a stable yuan for the time being,” Goldman Sachs Group Inc. strategists including New York-based Zach Pandl wrote in a report on Oct. 5. “Despite an imperfect domestic economic picture, we see our 3-month USD/CNY forecast of 6.9 as appropriate for now”
The country’s trade balance will also be a focus on Friday after “softer PMIs in China at the beginning of the month raised nerves around the impact that the trade war was having,” Australia & New Zealand Banking Group Ltd. analysts including Sydney-based Daniel Been wrote in a note
Close attention will be paid to inflation figures due Friday after India’s rupee completed its sixth weekly decline against the dollar that left it a fresh all-time low. Policy makers surprised markets Friday by standing pat on interest rates.
The Reserve Bank of India left its repurchase rate at 6.5 percent, while changing the stance of monetary policy from neutral for the first time since February 2017 to “calibrated tightening”