DXY index stalls on upbeat China data

DXY dollar index stalls on better-than-expected Chinese growth

Stronger-than-anticipated Chinese economic growth figures on Wednesday provided a boost to Asian currencies, propelling the yuan to its highest level in a week and exerting downward pressure on the U.S. dollar.

Nonetheless, an explosion at a Gaza hospital led to relatively restrained market movements, with traders remaining vigilant about the potential for the conflict to escalate. U.S. President Joe Biden's scheduled visit to Israel on Wednesday added to the sense of uncertainty.

Data from China’s National Bureau of Statistics revealed that gross domestic product (GDP) expanded by 4.9% year-on-year in the July-September period. This exceeded analysts' expectations, as a Reuters poll had originally projected a 4.4% increase — although it was slower than the 6.3% growth seen in Q2 2023.

On a quarter-to-quarter basis, China’s economy grew by 1.3% growth in Q3 2023, accelerating beyond the 0.5% growth in Q2 2023 and above the growth forecast of 1.0%.

The Chinese yuan reached a one-week high at 7.2905 per dollar on the news, although it later retreated to 7.312. The China-sensitive Australian dollar saw a 0.24% increase, reaching $0.6381, while the New Zealand dollar also rose by 0.18% to $0.5907. The euro to dollar rate held steady at $1.0571, while sterling was up 0.1% at $1.2194 after data showed British inflation failed to decrease as expected in September.

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USD outlook: Currency markets so far muted on Israel-Hamas conflict, says Wells Fargo

In a comment to Reuters, Erik Nelson, macro strategist at Wells Fargo, said he expected more of a negative impact on the U.S. currency, given the markets’ generally pessimistic views on China’s economy.

"The Kiwi and Aussie are outperforming, but I'm surprised that (the data is) not having a little bit more of an impact given how negative views have been on Chinese growth.”

Nelson added that investor reaction to the Israel-Hamas war had so far been muted. "If it spread to other regions which get pulled into the conflict, like Iran, then that's another story, but we're not there yet," he said.

The potential escalation of the war across the Middle East, as well as the risk of Iran’s increased involvement, has been cited as a key factor for global markets by multiple analysts in recent weeks.

On Wednesday, the U.S. dollar index traded marginally lower at 106.19. The gauge, which tracks the greenback against six major peers, rose 0.53% on Tuesday on the back of better-than-expected retail sales data, but remains below an 11-month high of 107.34 touched last week.

DXY index: Westpac, Citi HK bearish on the dollar index

In another comment shared with Reuters, Westpac analyst Imre Speizer said the DXY index had potentially reached its limits at the current point in time:

"It's had a really good run and it's stalled a bit. Maybe it's hitting the limits of this stage of the rally, and needs a bit of a correction."

In its USD forecast, last updated this Monday, Australia-based Westpac saw the dollar losing ground against most of its major peers in the coming months. The bank’s projection for the euro to dollar exchange rate was $1.09 by March 2024 and $1.11 by June 2024. The Aussie to dollar rate was projected to trade at $0.67 by March next year, potentially increasing to $0.68 by June 2024. As for cable, the GBP to USD rate, the bank saw a similar dynamic, projecting it to stand at $1.24 by March 2024 and $1.25 by June next year.

In an FX Snapshot last updated on October 16, analysts at Citibank Hong Kong also maintained a bearish view on the U.S. dollar index, projecting it to trade around the 104.48 level in 6 to 12 months’ time. The bank’s long-term on the DXY was even more bearish, as it projected it to trade at an average of 93.48.

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