Risk appetite attempted to stabilise during Tuesday, but sentiment remained fragile amid China concerns.

Risk appetite attempted to stabilise during Tuesday, but sentiment remained fragile amid China concerns. Wall Street equities were subjected to choppy trading with little net change.

Chinese liquidity injections helped underpin confidence in Asia on Wednesday as Evergrande looked to meet a local bond payment. Chinese equities edged higher with US futures also posting gains. US bond yields overall were little changed.

The dollar overall was mixed, but held steady ahead of Wednesday’s Fed statement. EUR/USD stalled around 1.1750 with little net change. Sterling was unable to make headway despite more stable risk conditions amid reservations over growth developments. Commodity currencies were subjected to choppy trading with net gains as risk appetite stabilised.

Overall risk conditions held steady into Tuesday’s New York open with markets looking to consolidate after the sharp equity-market losses on Monday. The dollar was unable to make headway, although EUR/USD hit selling interest at the 1.1750 level with traders unwilling to engage in aggressive positions.

Latest opinion polls for the German election continued to point to a small lead for the opposition SPD party over the CDU/CSU alliance with the Greens polling over 15%. There was some further speculation that there would be a looser fiscal policy from the next government which could underpin the Euro.

US housing starts increased to an annual rate of 1.62mn for August from 1.55mn previously and above consensus forecasts of 1.55mn. Building permits also increased to 1.73mn from 1.63mn and also comfortably above market expectations.

The Philadelphia Fed non-manufacturing index retreated sharply to 9.6 for September from 39.1 the previous month with a slowdown in the rate of revenue and new orders growth. There was further strong growth in wages and benefits while costs and prices increased at a faster rate with the prices paid index close to record highs.

There was further uncertainty ahead of the Federal Reserve policy decision with EUR/USD drifting lower to 1.1715 amid choppy trading in commodity currencies. EUR/USD traded close to 1.1720 in early Europe on Wednesday with markets monitoring the Fed statement, dot plot and Powell’s press conference.

US Treasuries lost ground after Tuesday’s European open, but the 10-year yield was held just below the 1.35% level and Treasuries edged higher again at the Wall Street open. The yen was resilient and USD/JPY retreated to near 109.20 with EUR/JPY hitting 7-month lows below 128.00.

The US current account deficit widened to a 14-year high of $190bn for the second quarter of 2021 from a revised $189bn the previous quarter. The deficit will maintain the risk of significant downward pressure on the dollar if there is a dip in long-term capital inflows.

It was confirmed that Evergrande missed at least two scheduled debt payments on Monday and there is a further larger payment due on Thursday.

The Bank of Japan made no policy changes with interest rates held at -0.1%.The economic assessment was mixed with cuts to the assessment for exports and output.

Chinese markets re-opened following a 2-day holiday and the central bank added liquidity aggressively to underpin markets with a total net injection of CNY110bn.  Evergrande also announced that it would make a yuan-denominated bond payment due on Thursday which boosted risk appetite, but there were fears that there would be a default on dollar-denominated bonds.

Overall risk appetite was supported by Chinese developments, although there was still an important element of caution. The yen lost some ground with USD/JPY trading just above 109.50 as EUR/JPY recovered some ground.

The CBI industrial orders index strengthened to 22 for September from 16 in August and above consensus forecasts of 15. This was also the strongest reading since 1977 with export orders posting the best reading since March 2019. There were still important supply-side difficulties and upward pressure on costs remained strong.

Sterling was unable to draw support from the data and also struggled to make any headway despite the net improvement in risk conditions. There were further doubts whether the Bank of England would deliver a hawkish policy stance at Thursday’s policy meeting which capped potential support.

GBP/USD dipped to lows below 1.3650 before stabilising into the European close while GBP/EUR dipped to lows near 1.1640.

The latest Yougov long-term inflation survey recorded an increase in 5-10-year annual inflation expectations to 3.8% with commentary that there is an increasing risk that expectations could become unanchored to the upside. Higher inflation expectations could push the central bank towards policy tightening.

Economic Calendar

12:00USD MBA Mortgage Applications0.30%
15:00USD Existing Home Sales(AUG)5.99M
15:00USD Existing Home Sales Change(AUG)2.00%
15:00Euro-Zone Consumer Confidence(SEP)-5-5.3
15:30USD Crude Oil Inventories-2.400M-6.422M
19:00USD FOMC Projections of Economy
19:00FOMC Interest Rate Decision0.25%
19:00FOMC Press Conference

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.