Aurelia Butler

ORLANDO, Florida (Reuters) – Japanese and Chinese monetary policy is diverging, meaning other Asian currencies may now also be at a crossroads.     Do currencies, such as the South Korean won, Indian rupee and Indonesian rupiah take their cue from a firming yen being supported by expectations of policy tightening from the Bank of Japan, or from a depreciating yuan being weighed down by the People’s Bank of China’s need to ease policy to stimulate a struggling economy?    Until recently, the yen and yuan had been joined at the hip, with both under heavy selling pressure as a relentless ‘higher for longer’ Fed outlook caused the U.S. dollar to rally. But that relationship and U.S. rate expectations have both shifted.     Between late April and mid-July, the simple 30-day rolling correlation between the yen and yuan steadily strengthened to its most positive level in 10 months. But it has subsequently reversed.This is largely because the PBOC surprised markets last week by cutting key interest rates. And this week the yuan, which is tightly controlled by the central bank, was fixed at the weakest level against the dollar this year. Meanwhile, Chinese bond yields are at record lows, and pressure on the exchange rate is firmly to the downside.    The yen, meanwhile, has jumped some 8% from its recent 38-year low against the dollar. The BOJ followed up March’s historic rate hike – the first in 17 years – with a larger-than-expected increase on Wednesday and signaled its commitment to end its decades-long use of ultra-loose policy.    Of course, around $100 billion of yen-buying intervention from Tokyo in the last few months has put a floor under the currency, and the BOJ’s approach to raising rates is hardly gung-ho. So the yen is not a sure-fire bet to strengthen aggressively from here.     But the policy divergence with China is clear, and it’s muddying the waters for other Asian currencies. From China’s mini-devaluation in 2015 to the beginning of the Federal Reserve’s recent rate-hiking cycle, every Asian currency was more sensitive to dollar/yuan than dollar/yen, especially the won, rupiah, Malaysian ringgit and Taiwanese dollar. Even India’s rupee, the Asian currency least influenced by the yuan, was still three times more sensitive to moves in China’s currency than Japan’s.However, once the Fed started tightening policy in 2022, Asian currencies began to be led mostly by the extraordinary rise in dollar/yen. According to analysts at Goldman Sachs, longer-term correlations show that the yen’s influence on Asian currencies surged dramatically when U.S. rates started rising.But that correlation has faded since the Fed stopped hiking a year ago.”As such, the broad USD and USD/CNY matters more for Asian FX than USD/JPY,” they wrote in a recent report.So if the yuan stays weak, Asian currencies could remain on the soft side even as a Fed easing cycle weighs on the dollar. That’s probably not bad news – given China’s economic struggles and the likely slowdown in U.S. growth, Asian capitals may welcome weaker exchange rates more than they fear the inflationary consequences.Beijing likely won’t be too upset if the yuan and yen diverge.     Since the onset of the pandemic in March 2020, Japan’s currency has depreciated around 30% against the yuan. Or to put it another way, on a simplistic exchange rate basis, Japanese goods became 30% cheaper over that time compared with equivalent Chinese goods on the international market.     Meanwhile, China is also facing the specter of an intensifying trade dispute with the U.S. The trade war between the two countries during Donald Trump’s presidency was followed by protectionist policies of President Joe Biden’s administration, and the dark cloud of much heavier U.S. tariffs after November’s election is looming. This has all had the expected impact: U.S. imports from China as a share of its total imports fell by 8% over the 2017-2023 period, according to Oxford Economics. However, the share of U.S. imports from Europe, Mexico, Vietnam, Taiwan and South Korea rose. Meanwhile, these countries – especially Vietnam – all saw imports from China rise as a share of their total imports over the same period. Beijing will want to ensure that any deterioration in bilateral U.S.-China trade continues to be made up for elsewhere. A weaker yuan, relative to its main regional rival the yen, might help.(The opinions expressed here are those of the author, a columnist for Reuters.) (By Jamie McGeever; Editing by Tomasz Janowski) More

WASHINGTON (Reuters) -The Federal Reserve is expected to leave interest rates unchanged at the end of a two-day policy meeting on Wednesday, but also indicate that a reduction in borrowing costs could come as soon as September.Contracts tied to the U.S. central bank’s policy rate show investors are convinced a rate cut will happen at the Sept. 17-18 meeting, with the only disagreement over whether the Fed will begin easing policy with a quarter-percentage-point reduction, as most expect, or a more aggressive half-percentage-point cut, according to CME Group’s (NASDAQ:CME) FedWatch tool.The Fed has kept its policy rate in the 5.25%-5.50% range for the past year.A 50-basis-point rate cut would likely require evidence that the economy is slowing faster than expected and putting at risk the still-low, 4.1% unemployment rate.Throughout the Fed’s more than two-year battle to tame inflation, which included the fastest rate hikes since the 1980s, the economy has grown faster and performed better than expected – and the most recent data suggests that is continuing.The economy grew at an above-trend 2.8% annual rate in the second quarter. Job openings and hiring data released on Tuesday showed continued resilience in the job market, with the number of open positions remaining above 8 million. The layoffs rate also dropped. The rate at which workers are quitting jobs and the ratio of unemployed people to open positions, now at 1.2, are both roughly where they were before the COVID-19 pandemic, a fact that has led Fed officials to regard the supply of and demand for workers in the economy as roughly balanced. The employment cost index, a quarterly measure that includes wages and benefits, increased 0.9% in the second quarter, less than the 1% gain expected by economists in a Reuters poll. The reading likely will add to the sense among Fed officials that the job market and rising wages won’t stoke new price increases. “The labor market has cooled over the last several months but isn’t weak,” said Nancy Vanden Houten, lead U.S. economist for Oxford Economics. “That’s a scenario the Federal Reserve wants to guard against, and we expect the Fed to begin cutting rates in September.”The central bank’s new policy statement will be released at 2 p.m. EDT (1800 GMT), and Fed Chair Jerome Powell will hold a press conference half an hour later.’NORMALIZATION OF ACTIVITY’Analysts say they expect Powell to emphasize that the Fed will remain “data-dependent” when it comes to its ultimate rates decision, with a larger-than-usual gap of time between now and the next meeting and more data to go along with it.That begins with the release on Friday of the Labor Department’s employment report for July. Economists polled by Reuters on average expect firms added a still-solid 175,000 jobs this month, with the unemployment rate unchanged. Recent data has shown inflation continuing to slow, with the headline personal consumption expenditures price index increasing at a 2.5% annual rate in June and at around 1.5% for the last three months.The Fed targets 2% annual inflation based on the PCE price index.”The Fed does not believe it needs to hurry” and cut rates now, said Tim Duy, chief U.S. economist at SGH Macro Advisors. After a strong initial report on second-quarter economic growth, “the data remain consistent with a normalization of activity rather than a sharper slowdown. Rate cuts at this point are still preemptive with the goal of stabilizing activity at the current near-trend pace.” More

(Reuters) – British finance minister Rachel Reeves plans to raise taxes when she presents her budget in three months’ time, but her options are limited by her promise not to increase taxes paid by “working people”.On Monday, Reeves said the Labour government, which won a landslide victory in the July 4 election, had inherited a hole in the public finances of 22 billion pounds ($28 billion).She has warned that taxes would need to rise in the Oct. 31 Budget, while sticking to Labour’s manifesto commitment that not to raise the rates of income tax, national insurance, value-added tax or corporation tax.Below are some of Reeves’ options:CAPITAL GAINS TAXCapital gains tax raised 15 billion pounds in the last financial year. While worth only around 4% of receipts from all taxes on income, Reeves may try to up that figure.CGT is charged at a much lower rate than the upper rates of income tax, reflecting past attempts to encourage entrepreneurship. But this led hundreds of thousands of people to convert ordinary income into capital gains to lower their tax bill.The Resolution Foundation think tank said Reeves could increase the rates of CGT but soften the blow by reintroducing indexation – meaning capital gains are taxed only after inflation. Together, these measures could raise 7.5 billion pounds.She could also increase tax paid on dividends.INHERITANCE TAXA politically sensitive subject, past governments have avoided major reforms to inheritance tax, which is currently paid after only 4% of deaths, raising about 7.5 billion pounds per year.IHT is paid at a rate of 40% on the value of estates above a threshold of 325,000 pounds – which has not changed since 2009. There are additional allowances for transferring family homes to younger generations.The system has increasingly favoured wealthier families.The Institute for Fiscal Studies thinks 2.7 billion pounds could be raised by making some IHT allowances – which exempt assets like family businesses, farmland, woodland and pension savings – less generous. PENSION REFORMSReeves could tweak pension tax reliefs to raise more money – such as the tax-free lump sum, which enables pensioners to withdraw 25% of their pension as cash without paying tax, up to a value of 268,275 pounds. The IFS estimates that removing this allowance completely could raise 5.5 billion pounds over the long run.She could also reduce the generosity of tax reliefs on pension contributions for higher-rate taxpayers, by introducing a flat rate instead. FUEL DUTYTax paid on motor fuels has been frozen every year since 2011 – except for a temporary cut in 2022/23.Past governments had always in theory planned to raise fuel duty – flattering the outlook for the public finances – but in practice they never followed through, fearing a backlash from drivers.Economists have long criticised this as a fiscal charade which Reeves could end on Oct. 31, burnishing the government’s green credentials in the process. In the March budget published by the previous Conservative government, the latest cancellation of the fuel duty rise cost more than 3 billion pounds in 2024/25.($1 = 0.7792 pounds) More

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LONDON (Reuters) -Corporate credit markets shrugged off last week’s equity wobble, setting aside any anxiety about the wider economy, allowing even low-rated firms to raise new debt with ease.For many investors, so-called junk credit is the canary in the coalmine. It is the first to croak if the economy runs into trouble, and it can also amplify any distress by upping fears of cascading defaults, bankruptcies and job losses.But there are few if any signs of that fear right now, which underscores how widespread the ‘soft landing’ consensus is. This also suggests the equity hiccup we saw last week was more about pricey megacaps and Big Tech corrections than a fundamental worry about growth per se.In fact, default rates are falling again. Deutsche Bank points out that trailing 12-month defaults for dollar high-yield bonds fell in June to their lowest point in almost a year – to just 3.1%. The default rate of the weakest “CCC”-rated segment fell for the third consecutive month to its lowest since July 2023.That’s below the 4% average default rate of the past four decades and only marginally above the 2.9% average of the past century, according to Schroders (LON:SDR).  Yield spreads – the U.S. junk bond borrowing premia over equivalent Treasuries – remain close to their two-year lows. At 353 basis points, they’re almost 100bp below levels seen this time last year, and spreads on ‘B’ and ‘BB’ segments are the narrowest they have been since the banking and credit implosion 15 years ago. What’s more, junk bonds are outperforming better-rated investment grade debt for the year to date.    And that long-feared ‘wall’ of maturing debts next year now looks more like a jump-able hurdle, as many companies are having no trouble smoothing out their financing schedules.In fact, many have been able to raise enough new debt to clear the decks ahead of any market disturbance that could arise around the U.S. election later in the year.High yield debt issuers have raised $176 billion so far this year – which is almost 80% ahead of last year’s pace. And the market has had no trouble absorbing this flood of issuance.This is partly because demand for high yield debt is high, but supply of new paper isn’t. Credit analysts at giant asset manager BlackRock (NYSE:BLK) point out that while a ton of high yield debt has been issued this year, only a minimal amount of new money has been raised. A whopping 75% of new debt sales this year have been earmarked for refinancing, the highest level seen in the post-2008 era and more than 10 points above June 2023 levels.Highlighting this ‘pull forward’ in debt sales in both the high-yield and investment-grade markets, BlackRock strategists Amanda Lynam and Dominique Bly reckon management teams are targetting maturities as far out as late 2025 and even 2026 and are keen to avoid any fund-raising difficulties around year-end.”Corporates may be looking to proactively raise liquidity and avoid potential volatility around certain events later this year – such as the U.S. election,” they wrote.REASSURINGLY EXPENSIVE?Is the appetite sustainable?Falling rates without a recession is a powerful combination for anyone wanting to move out of cash and lock in high yields. Some even argue that if you want to avoid Treasuries due to outsize post-election fiscal risks, then corporate credit may be the best middle ground.But some strategists caution that August and September are seasonally unkind to credit markets. And there is a continual fine balance between falling interest rates and recession risks.”Central banks are late – they usually are – making it important that the data hold up,” Morgan Stanley’s credit team told clients. But the U.S. investment bank remains positive and reckons “moderate growth, moderating inflation, moderating policy and robust investor demand” all justify the historical pricing for U.S. credit.”Spreads should be ‘expensive’ given this backdrop, and we think they stay that way,” they said.So while we may see a surge in volatility as the election nears, we’re unlikely to see a similar spike in defaults.The opinions expressed here are those of the author, a columnist for Reuters.(by Mike Dolan X: @reutersMikeD; Editing by Stephen Coates) More