The revisions to the Fed's forecast as well as recent FOMC commentary, though, are increasingly signaling the need for a "higher for longer" outcome, given the distance from policy objectives. Our recent visit to China, meanwhile, leaves us more convinced of the determination of the policymakers there to achieve their "around 5%" growth target for the year. While this would likely warrant a mix of fiscal and sector-specific policy measures, it is unlikely that it could be achieved without also pushing further on the monetary lever. DB Economics expects another rate cut in 4Q and further liquidity injection. Prioritizing stability in growth should imply pressure from wider rate differentials on FX.
We have seen $31bn and $20bn of bond and equity outflows, respectively, this year via the various connects. We note that these reflect not just foreign investors reducing their holdings, but also the desire of domestic residents to diversify their holdings abroad.
Widening interest rate differentials and shrinking BoP surpluses will likely keep the RMB under pressure. We note, though, the discomfort that the authorities have expressed with the markets considering the RMB to be a "one-way bet" and the widening of their efforts – wider fix/model basis, tighter CNH liquidity, fewer outflow channels – to lean against this. - Deutsche Bank Strategy
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