China Lets Yuan Weaken After Defending 7.3 Per Dollar for Weeks

Central Bank

Forex

Summary:

The onshore yuan weakened past a level that China had been defending throughout December, opening up room for the managed currency to drop further amid a sluggish economy.

China Lets Yuan Weaken After Defending 7.3 Per Dollar for Weeks_1

The yuan breached the psychological milestone of 7.3 per dollar for the first time since late 2023, amid concerns over China’s economic struggles and a widening bond yield discount to the US. The move came even as the central bank maintained its support for the currency with its daily reference rate on Friday.

The break may signal that the People’s Bank of China is looking to accommodate mounting growth pressures through a weaker currency after holding it almost unchanged for more than two weeks. As a result of Beijing’s control, the yuan climbed to the highest since 2022 versus trading partners’ exchange rates — a move that may undermine the nation’s export competitiveness.

The break of 7.3 “in a way is inevitable with continued dollar strength and the relentless fall in domestic government bond yields,” said Wee Khoon Chong, senior APAC market strategist at BNY. “Risk for dollar-yuan remains on the upside.”

The onshore yuan slid as much as 0.3% to 7.3190 on Friday before paring the move. A drop past 7.3510 per dollar would take the currency to its weakest level since 2007.

The decline has hurt sentiment in other emerging markets, with the Taiwan dollar declining to the weakest level since 2016 and the won erasing earlier gains.

Chinese state banks had briefly stepped away from selling the dollar at around 7.3 in the afternoon, spurring investors to send the yuan weaker than that level, according to traders. The lenders resumed selling the greenback at around 7.31, said the traders, who asked not to be identified as the matter was private.

Looking ahead, China’s economic fundamentals point to further depreciation. Risk sentiment is so poor that the benchmark stock index just closed at the weakest level since September and sovereign yields hit fresh record lows. US President-elect Donald Trump had also threatened to impose tariffs on Chinese exports.

In November, the country already suffered the biggest outflow on record from its financial markets.

Adopting a rigid FX strategy by drawing a red line is controversial, as artificial stability in the market may lead to outbursts of volatility in the future. In August 2015, the PBOC’s surprise move to allow the yuan to weaken after holding it little changed at 6.2 for months led to massive capital outflows and a panic selloff of Chinese assets.

Strategists at BNP Paribas SA see the yuan falling to 7.45 by the end of 2025, while Nomura forecast in December the currency may drop to 7.6 in overseas trading by May. JPMorgan Chase & Co. expects the offshore yuan to weaken to 7.5 in the second quarter.

“Once 7.3 is gone, I doubt there are many speed bumps along the way,” said Mingze Wu, currency trader at Stonex Financial Pte Ltd. “It’s likely market is just a bit shell-shocked and wondering what to do — it’s like a dog finally caught its own tail.”

Still, the PBOC may not allow a rapid and disorderly decline as that may lead to financial instability. It can still use its fixing — which confines the currency’s trading onshore to a 2% range on either side — to guide expectations, after keeping it at levels stronger than 7.2 for months.

Other tools at PBOC’s disposal include mopping up yuan liquidity in offshore trading and direct intervention in the FX market.

“Going forward, a calibrated yuan adjustment is more likely than an abrupt change,” said Wei Liang Chang, a strategist with DBS Bank Ltd. “Policymakers would likely seek to keep yuan depreciation expectations in check to avoid denting Asian risk sentiment.”

Source:Bloomberg News

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TD Securities

Economic

U.S. Deficits: Can You Take Me Higher?

The coming U.S. budget debate is likely to be contentious as it balances various interests. We expect deficits to continue to rise for several reasons:

Trump victory: The Republican wave is likely to keep deficits rising amid the renewal of the 2017 tax cuts, which would add a further US$4-5 trillion to current Congressional Budget Office baseline projections over the next decade.Interest expense continues to rise: The Treasury paid nearly US$1 trillion of interest in FY2024. Even if interest rates remain near current levels, the debt burden is set to rise significantly over time. Interest expense as a portion of GDP has reached 3.9% and is likely to continue climbing further.Decline in discretionary outlays: The share of discretionary outlays as a portion of total deficits has declined to just 25% of the total budget in recent years. Higher interest expenses reduce discretionary outlays even further. This will make reducing deficits even more difficult in the coming years as changing entitlement spending has been a no-go zone for politicians.

Tariffs by the Dozen

There’s no certainty about what President Trump will do on the tariffs front, despite his proclamations. We can read his “Truths,” and we can make assumptions about how literal he is, but ultimately, it’s more useful to have a framework and rules-of-thumb that can be adapted as policy develops. On that front, we can assume the following temporary impact on US headline inflation from tariffs:

60% tariffs on China boost inflation by 0.7ppts after a year10% tariffs on countries outside Canada/Mexico/China boost inflation by 0.5ppts after a year25% tariffs on Mexico and Canada combined boost inflation by 0.6ppts after a year.

China: He Said, Xi Said

It's clear that the U.S. and China have no love lost between them. That said, China is perhaps the one country most likely to strike a deal with Trump. The country is still unlikely to avoid sharp tariffs, and we expect retaliation from China once the U.S. tariffs are in place. This could include restrictions on exports of rare earth commodities or components used in the energy industry; in other words, narrow categories that could inflict sharp pain in strategic industries. However, the overall impact of trade restrictions that China can impose in the U.S. is likely to be fairly minimal and not of broad economic significance.

Europe: Stuck in the Middle With EU

The European Union (EU) is more likely to get caught in the crossfire between the U.S. and China. The EU-US relationship has been rigid under President Biden, so Trump may still be welcomed cautiously, simply because he moves the dial. The EU has faced evasive and shifting priorities when negotiating with the U.S. causing it to shift its focus towards China. This is going to cause problems for the U.S., who may insist on changes to the EU-China relationship in any negotiations. This will frustrate the EU, who sees China as a source of cheap green technology that can help the region achieve its green goals as well as a large market for its manufacturing sector.

Global Markets: Welcome to the Jungle

Turning to markets, what does this all mean? As we end 2024, U.S. yields have remained anchored to data, yet equity gains seem to have stretched that relationship. The next year marks a transition from pure data dependence to policy dependence. Don't be fooled; policy dependence augments – not replaces – data dependence. The monthly correlation of U.S. Treasury yields to U.S. surprises during Trump's first term was 0.6 (or 0.8 if we exclude the pandemic-impacted 2020) compared to the 20y average of 0.4. Markets will be driven first by the expected impact of policy plans, then by the actual impact of delivery.

Source：TD Securities

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JPMorgan

Economic

Growth

According to the second estimate, the U.S. economy expanded at a solid 3.1% saar, notching a second consecutive quarter of above trend growth. Consumer spending continued to power the economy forward, rising 3.7%, while government spending also looked strong. Business fixed investment rose 4.0% while residential investment remained a drag. With businesses likely rushing to build up inventory ahead of the port workers strikes in late September, imports jumped 10.7% and weighed on growth. Overall, despite concerns about the labor market and the manufacturing sector, the U.S. economy remains solid.

Jobs

After strikes and hurricanes disrupted labor market activity last month, the November Jobs report showed a rebound in hiring. Nonfarm payrolls rose by 227K, beating expectations, while upward revisions added 56K jobs to the prior two months. The private sector accounted for 85% of this month’s job growth with health care and leisure and hospitality adding 72K and 53K jobs, respectively. Elsewhere, wages rose 0.4% m/m and 4.0% y/y, while the unemployment rate ticked higher to 4.2%. Overall, the labor market still looks solid, although the stability in wages and uptick in the unemployment rate tilts the scales further toward a December rate cut.

Profits

3Q24 pro forma earnings per share (EPS) came in at $61.61, representing growth of 4.6% y/y and 1.8% q/q. Mega cap tech delivered another quarter of double digit earnings growth as did health care. Elsewhere, cyclical value sectors saw earnings fall. Moving forward, lower rates and regulatory uncertainty should provide a boost to manufacturing-tied sectors along with financials as management teams ramp up investment. This means less focus on returning capital to shareholders, so sales growth will be an increasingly important driver of future earnings.

Inflation

At the headline level, the November CPI report showed that progress on disinflation has stalled, although the underlying details suggest that positive progress is still being made. Headline CPI rose 0.3% m/m with base effects pushing the annual increase to 2.7%, while core inflation held steady at 0.3% m/m and 3.3% y/y. In the details, inflation appeared to be hottest in segments aligned with resilient mid-to-upper income consumption, including autos, travel and leisure and recreational services. Importantly, many of these segments are volatile and don’t appear to be on an upward trend. In more welcome news, shelter and auto insurance inflation eased, rising 0.3% and 0.1%, respectively. On the other hand, headline and core PCE came in just below expectations, rising 2.4% and 2.8% y/y, respectively. Overall, as base effects turn more favorable and core services disinflation continues, inflation should resume its steady descent back to 2%.

Rates

At its final meeting of 2024, the Federal Reserve voted to cut the federal funds rate by 25bps to a range of 4.25% to 4.5%. That said, statement language and the new Summary of Economic Projections (SEP) leaned hawkish. In acknowledgement of resilient economic growth, diminished downside risks to the labor market and slower progress on disinflation, the updated SEP showed a higher growth and lower unemployment forecast for 2025, and higher inflation forecasts for 2025 and 2026. Moreover, the committee penciled in just 2 rate cuts in 2025 vs. 4 in the September SEP. Importantly, a few members incorporated potential fiscal policies and tariffs into their estimates. That said, the pace of rate cuts, while likely to be more gradual, will continue to hinge on the data until we gain more clarity on President-elect Trump’s policy agenda.

Risks

Geopolitical tensions and policy uncertainty may heighten market volatility.A slow-moving economy is more vulnerable to any kind of shock.Moderating economic growth could weigh on earnings, leaving markets vulnerable at stretched valuations.

Source：JPMorgan

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Warren Takunda

Cryptocurrency

Ethereum’s native token, Ether, jumped 3.40% on Jan. 2, moving closer to trading above $3,500 for the first time since Dec. 19. The crypto asset also moved above its 50-day EMA level on the daily chart after breaking below the indicator last week. Why Is Ethereum (ETH) Price Up Today?_1

Ethereum 1-day chart. Source: Cointelegraph/TradingView

The altcoin rallied alongside the broader crypto market, with Bitcoin rising above $96,000 and major altcoins such as XRXRP$2.42 and Solana rising by 9%, respectively.

Bitcoin dominance drops below 58%

Ether’s price rally has coincided with Bitcoin dominance dropping under 58% for the first time in two weeks. The continued decline in the BTC dominance index started at the end of 2024, which implied that altcoins were collectively gaining market share against Bitcoin. Why Is Ethereum (ETH) Price Up Today?_2

Bitcoin dominance chart. Source: Cointelegraph/TradingView

Anonymous crypto trader Satoshi also highlighted the Bitcoin dominance percentage in terms of a declining wave, which implied the possible continuity of an altcoin season in 2025. The trader said,

“Altcoin history is doing its thing again. Doubting Altcoin season? Think again!” Why Is Ethereum (ETH) Price Up Today?_3

Bitcoin dominance % waves by Satoshi. Source: X.com

Additionally, Ether’s price is up on the back of bullish sentiment emerging from the futures traders over the past couple of days. Data from CryptoQuant highlighted a sharp rise in funding rate on Jan. 1, which signaled that a majority of traders have open long positions.

The rise in funding rate coincided with Ethereum exchange reserves declining on all platforms, which suggested an influx of spot buyers as well. Why Is Ethereum (ETH) Price Up Today?_4

Ethereum funding rate on all exchanges. Source: CryptoQuant

Ascending triangle pattern sets a $4,000 ETH target

From a technical perspective, Ethereum is forming a bullish ascending triangle pattern on the 4-hour chart, which is eyeing a breakout above the key resistance level at $3,500. Why Is Ethereum (ETH) Price Up Today?_5

Ethereum 4-hour chart. Source: Cointelegraph/TradingView

However, a couple of hurdles may hinder an immediate breakout for the altcoin. Firstly, ETH needs to establish a bullish breakout above each 50-day, 100-day, and 200-day EMA level and close a position above these indicators.

A bullish close above $3,500 on the daily chart is pivotal, and it would confirm a strong breakout from the triangle pattern, and increase investors’ confidence. With an ascending triangle pattern carrying a 75% probability of a bullish move, Ether’s immediate target remains around $3,850 and $4,000, which is a 15% swing from ETH’s current value.

Source: Cointelegraph

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Warren Takunda

Commodity

Oil prices barely budged on Friday after closing at their highest in more than two months in the prior session, amid hopes that governments around the world may increase policy support to revive economic growth that would lift fuel demand.

Brent crude futures edged up 1 cent to $75.94 a barrel by 0720 GMT, after settling at its highest since Oct. 25 on Thursday. U.S. West Texas Intermediate crude was also up 1 cent at $73.14 a barrel, with Thursday's close its highest since Oct. 14.

Both contracts are on track for their second weekly increase after investors returned from holidays, improving trade liquidity.

Factory activity in Asia, Europe and the U.S. ended 2024 on a soft note as expectations for the New Year soured due to growing trade risks from Donald Trump's impending return to the U.S. presidency and China's fragile economic recovery.

"The December PMIs for Asia were a mixed bag, but we continue to expect manufacturing activity and GDP growth in the region to remain subdued in the near term," Capital Economics analysts said in a note, referring to purchasing managers' indexes data published on Thursday.

"With growth set to struggle and inflation below target in most countries, we think central banks in Asia will continue to loosen policy."

Lower interest rates should spur more economic growth and likely lead to higher fuel consumption.

Investors are eyeing further interest rate cuts by the Federal Reserve this year to support the U.S. economy, while China's President Xi Jinping has pledged more proactive policies to promote growth.

Most of the poll respondents expect the oil market to be in a surplus next year, with analysts from JPMorgan

"As China's economic trajectory is poised to play a pivotal role in 2025, hopes are pinned on government stimulus measures to drive increased consumption and bolster oil demand growth in the months ahead," StoneX analyst Alex Hodes said.

The market is also looking to upcoming crude prices from top oil exporter Saudi Arabia. Saudi Arabia may raise crude prices for Asian buyers in February for the first time in three months, tracking gains in Middle East benchmark prices last month, traders said.

In the U.S., the world's biggest oil consumer, gasoline and distillate inventories jumped last week as refineries ramped up output, though fuel demand hit a two-year low.

Crude stockpiles fell less than expected, down 1.2 million barrels to 415.6 million barrels last week compared with analysts' expectations for a 2.8-million-barrel draw.

Traders are paying close attention to recent weather forecasts as expectations of a cold snap in the U.S. and Europe over the coming weeks could boost demand for diesel as a substitute for natural gas for heating.

Investors are also bracing for Trump's presidency ahead of his Jan. 20 inauguration.

"Trump's tariffs on China and their impact on global demand patterns will be central to oil prices in 2025," said Priyanka Sachdeva, senior market analyst at Phillip Nova.

Source: Reuters

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Economic

Signs of market recovery emerge

The London Stock Exchange is showing promising signs of revival after a challenging 2024, with several major listings in preparation. These include Greek firm Metlen, targeting a £5 billion valuation, and Chinese retailer Shein, potentially worth £50 billion.

Trading online data shows only £700 million was raised through eight initial public offerings (IPOs) in 2024, down from £800 million across 11 IPOs in 2023. Moreover, fears about the London market were exacerbated as three times as many firms left the market—via takeovers or relocating to other countries—as arrived. This decline reflects broader market challenges.

The FCA's new listing rules aim to attract more growth-focused businesses. Recent developments include UK equity funds seeing their first net inflows in 42 months.

French media company Vivendi decision to list Canal+ in London signals growing international confidence in the market.

Potential takeover targets emerge

Several UK companies have been identified as potential takeover targets by analysts.

ITV, valued at £2.7 billion, continues to attract takeover speculation, particularly from private equity firms. B&M's upcoming leadership transition makes it another attractive target.

Burberry, now valued at £3.4 billion after leaving the FTSE 100, appears vulnerable to acquisition given its strong brand value.

Larger companies like Diageo (£55 billion) and Whitbread (£5.2 billion) are also being watched for potential corporate activity.

Regulatory reforms support market confidence

Recent FCA reforms have made the market more appealing for trading and investing. These changes aim to attract entrepreneurs and growth companies.

Political stability and improved investor confidence are cited as crucial factors for market recovery. The end of regulatory uncertainty has boosted market sentiment.

Online trading platforms report increased interest in UK equities following these developments.

Market participants are optimistic about London regaining its position as a leading global financial hub.

Global competition intensifies

Europe's largest 2024 listing, CVC's €2 billion IPO, choosing Amsterdam highlights ongoing competition. This reflects the need for London to maintain its competitive edge.

Trading signals indicate increased activity in European financial centres competing with London.

The market faces challenges from other global financial hubs seeking to attract major listings.

London's response through regulatory reforms and market innovations aims to address this competition.

Outlook for 2025

2025 could mark a turning point for the London market, with several significant IPOs planned. Index funds may benefit from this renewed activity.

Improved political stability and regulatory clarity provide a stronger foundation for market growth.

The combination of new listings and reforms could help London reassert its position globally.

Success will depend on converting current optimism into tangible market activity.

Source：IG

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Warren Takunda

Economic

The euro declined 0.9% against the US dollar, reaching mid-1.02, its lowest level since 21 November 2022 on Thursday.

The common currency extended weakness against its counterpart at the start of the new year due to concerns about the Eurozone’s economic outlook, political instability, and a monetary policy discrepancy between the European Central Bank (ECB) and the Federal Reserve (Fed).

The EUR/USD pair has fallen sharply from the 2024 peak of above 1.12 in September, marking a 9% decline over three months.

The US dollar’s strength, bolstered by Donald Trump’s presidential victory, has exacerbated the euro’s weakness since November.

Parity in sight

Analysts expect the euro-dollar pair to reach parity in 2025, a level last seen in 2022 when Russia launched a full-scale military operation in Ukraine.

Adding to the Eurozone’s woes, Ukraine stopped Russian gas transit to Europe following the expiration of a five-year contract on Wednesday.

This development has forced many European countries to rely on costlier heating alternatives during a harsh winter.

Natural gas futures surged to a two-year high of more than $4 per million British thermal units (MMBtu) earlier this week, before retreating to $3.66 MMBtu during Friday’s Asian session.

Weak economic data further underscores the challenges. S&P Global’s final December manufacturing PMI for France and Germany showed continued contraction in the sector.

France reported its sharpest decline in manufacturing activity since May 2020, while Germany’s manufacturing output hit a three-month low.

In December, France’s central bank revised its economic growth forecast for 2025 down to 0.9%, from the previously projection of 1.2%.

Both France and Germany are grappling with political instability, as ruling party coalitions collapse amid surging far-right power.

Globally, the Eurozone faces mounting risks under Trump’s presidency. The US president-elect has pledged to impose higher tariffs on imports from China, Canada, and Mexico.

While no explicit announcements have been made, European automakers are particularly vulnerable to potential tariff hikes.

The dominance of the Dollar

The US dollar has been soaring amid a hawkish shift in the Fed’s monetary policy and Trump’s presidency. The dollar index surged to above 109 on Thursday, the highest since November 2022.

The Fed initiated the easing cycle with a jumbo 50 basis point rate cut in September. However, the bank shifted to a much more hawkish stance following resilient jobs data and improvement in other economic data.

In December, the Fed cut the interest rate by 25 basis points as expected. However, the bank signalled a much more hawkish stance on its easing cycle in 2025.

The Fed’s dot plot, a chart that projects the future path of interest rates, indicated a half-percentage point rate cut in 2025, compared to a full percentage cut projected in September.

In contrast, the ECB is likely to accelerate its rate-cutting cycle in 2025. The ECB reduced its policy rate by a full percentage point in 2024, and analysts expect another percentage-point cut next year as the Eurozone continues to face economic and political headwinds.

These include persistent political instability, a slowing Chinese economy, and the implications of Trump’s presidency, all of which contribute to a bleak economic outlook for the region.