China rate decision set to disappoint

Jan 22 – An interest rate decision in China kicks off the week in Asia on Monday with investors hoping – forlornly, perhaps – that the central bank will provide some much-needed relief for the country’s sluggish economy and creaking markets.

This will be followed by the Bank of Japan’s policy decision and guidance the next day – an equally anticipated event, but for different reasons – meaning trading activity and volume should start the week on a strong note.

Especially in foreign exchange.

The Chinese yuan and Japanese yen both go into their respective central bank meetings on the defensive against the dollar. The yuan last week touched a two-month low and the yen’s accumulated year-to-date losses reached 5%.

Indeed, out of nine Asian currencies only the Indian rupee is up against the dollar this year. And even then, only by a whisker.

The dollar is also up against every one of its rival G10 currencies even though the Fed is still expected to cut rates by more than any other major central bank in the world this year, despite the recent pullback.

Asian stocks should have a decent spring in their step on Monday after the S&P 500 hit a new all-time high on Friday.

The rise in global stocks was sparked by Taiwanese chipmaker Taiwan Semiconductor Manufacturing (TSMC), the world’s largest contract chipmaker. On Thursday it projected more than 20% growth in 2024 revenue on booming demand for high-end chips used in AI.

The MSCI Asia Pacific ex-Japan index rose more than 1% on Friday but still fell for a third consecutive week, and is down more than 5% year-to-date.

Chinese stocks are languishing around five-year lows, foreigners are pulling money out of the country, and the yuan is falling. Beijing is under pressure to act, but is nervous about the debt and FX risks associated with more stimulus.

The central bank on Monday is expected to leave the benchmark one- and five-year loan prime rates (LPR) unchanged at 3.45% and 4.20%, respectively. More disappointment for investors, or is it already priced into the currency and stocks?

Meanwhile, the BOJ is also expected to leave policy unchanged on Tuesday, and with inflation continuing its downward slide towards the BOJ’s 2% target, the pressure to ‘normalize’ policy and reverse negative interest rates is easing.

The yen is on the defensive and, despite an understandable wave of profit-taking after hitting 34-year highs, Japanese stocks could be set to rise again on Monday.

Other key events on the Asia/Pacific economic and policy calendar this week include South Korean GDP, Tokyo inflation, an interest rate decision in Malaysia, and consumer inflation figures from New Zealand, Vietnam, Singapore, Hong Kong, and Malaysia.

Here are key developments that could provide more direction to markets on Monday:

– China interest rate decision

– Malaysia CPI inflation (December)

– Hong Kong CPI inflation (December)

(By Jamie McGeever; Editing by Deepa Babington)