# Dollar Weakness, China Deflation, and Fed Rate Cut Outlook

**Podcast:** Bloomberg Daybreak: Asia Edition
**Published:** 2026-02-11

## Transcript

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Welcome to the Daybreak Asia Podcast.
I'm Doug Chrisner.
There's no trading today in Japan.
Markets are closed for National Foundation Day.
And as a result, there will be no trading in U.S.
Treasuries until the London session.
In the Japanese equity market on Tuesday, we had the Nikkei closing at a record high.
Shares in Softbank led the way with a gain of 10% ahead of its earnings.
Stateside, we did have the report on retail sales, and the reading was unexpectedly flat for the month of December.
Economists had expected an increase by four-tenths of one percent.
So the shortfall means the estimate on fourth quarter GDP will be reduced.
It also reinforces the case that perhaps the Fed can be a little more aggressive in cutting interest rates this year.
For a closer look at markets, I'm joined by Bloomberg strategist David Finerty.
David joins from our studios in Singapore.
Thank you for being here.
And I want to play to one of your strengths and talk about the currency market.
The Bloomberg dollar spot index has been down now for three straight sessions during New York trading.
And in that time it's lost around one percent.
Is the story on the weaker dollar really driving the narrative when you look at overall price action?
In FX markets, yes, I think it's basically dollar versus the rest of the world, basically in terms of currencies.
Uh the general sentiment, talking to a lot of traders and contacts I have, is that people generally would like to sell the dollar.
They need the excuse to do that.
Um they're getting some, but you get these pullbacks because the U.S.
data comes out a bit mixed.
You saw US retail sales overnight was weak, but you go back to the ISM data at the beginning of the month.
That was strong.
So obviously everyone's looking at what the payroll data is today, uh, particularly the unemployment rate is uh that is tends to be what the Fed focuses on.
Uh, if you did see an uptick in that, then I think the market would go, yes, finally we've got another green light to sell the dollar um and buy other currencies, and they're tending to buy if they're shorting the dollar, they're tending to go for the euro or the Aussie dollar tend to be the two popular ones at the moment.
But everything generally does well, but those tend to be the two popular trades.
So, as I mentioned, we did have that record high for the Japanese equity market on Tuesday.
A lot of this bullishness seems to be directly correlated to the so-called Take Ichi trade.
Expectations here that we're going to see a lot more in the way of fiscal spending, perhaps a cut in the sales tax on certain food items.
You would think with talk around fiscal stimulus that the Japanese currency would weaken, but that doesn't seem to have been the case.
So if you look at the yen strength, David, does that really revolve around the dollar weakness story?
Yeah, well, I would still remember dollar yen still trading, you know, 154.
So historically still at the weaker end of its range, shall we say, with like 160 basically being the the bottom of it.
Um some of it really, if we're honest, it's just this end of intervention fears that you have.
Some of it is a weaker dollar, but you know, when it was up around 157, just at the start of the week, um, you know, the what the market was the finance minister of Japan came out and did say, look, now we are watching currency markets, which again was we don't want that one sided speculation against the yen.
So that's a strengthen the yen, push dollar yen lower.
But if then as you said, some of it has been the dollar side.
What's interesting is talking to some traders yesterday when Dolly N was around 155, um, ahead of the UT US retail sales data.
I was like, you know, what's sort of the positioning on this?
Where are we?
And they go, Look, realistically, the long dollar yen longs have been sort of been squaring up.
It hasn't shifted to a dolly yen short position yet, they said.
Uh this is some of that, but not a lot.
I think everyone really is looking at this payroll number to get out of the way to give Glad greater clarity um in terms of where the dollar headed, and therefore obviously Dolly N will go with that.
The other story here that's kind of remarkable to me is the strength that we've been seeing in the Chinese currency, both offshore and onshore.
Is that again uh really about dollar weakness?
I think that's a bit of two things.
I mean, obviously the PBOC with the fix scenes has continually sort of indicated that it's quite happy for it to slowly appreciate.
And I emphasize the slowly appreciate.
The Federal Reserve came out recently, or sorry, the Treasury did in its semi-annual comfort report and did say, look at the rethink they think the Yuan was well undervalued.
So obviously they're giving in cut signs to China, let your currency appreciate.
China seems to be willing to let it appreciate to some degree.
I mean, we have 690s, you know, a lot of people saying that maybe 680, 670 versus dollar by year end.
Um that certainly is the path at the moment of least resistance.
Again, things can always change with geopolitics, which could disrupt the cart, but at the moment, the gr the trend higher, PBOC doesn't seem to be fighting that.
So the market, which is long yuan, so short Dolly one, is quite happy with this quite high at the moment.
So you mentioned that weak reading on retail sales, it caused money markets to s price slightly higher odds for three Fed rate cuts this year.
Two have already fully been priced in.
And I'm wondering whether or not you're comfortable with the idea that we could see as many as three, or is that maybe a little bit too much uh enthusiasm?
I think look at the moment the markets loves rate cuts.
So you give it a chance to to price in a rate cut, we'll happily do it.
So I think realistically that you're not going to get in a rate cut before Kevin Walsh, the new governor takes over.
So then you're looking for basically the second half of the year.
I think, you know, so there's a lot of data that can still come out ahead of that.
So is two feasible?
You go definitely.
I you're not gonna write off three.
Um, but I wouldn't at the moment say more than three.
But you know, the market's going two to three, given the amount of data that could still come out, which could move that probability, you go, well, you know, it's sort of fair, you know.
I don't think we're going extreme yet.
Um, but we're in that two to three camp.
And I think we'll stay there.
I think the markets be very reluctant to go under two.
We need some really, really strong data to do that.
But I think if we're going above three, then you really need some really weak data, particularly the employment unemployment rate to uptick.
Yeah, we'll get that U.S.
jobs data on Wednesday.
Today's Fed speak seemed to me to be a little hawkish.
We heard from the head of the Cleveland Fed, Beth Hammock, and she was saying that interest rates could be on hold for an extended period while the Fed evaluates incoming data.
And the head of the Dallas Fed, Laurie Logan, was saying it would take material weakness in the labor market for her to support more rate cuts.
I'm curious to get your take on this messaging.
Obviously, we're going to get a new Fed chairman soon.
And perhaps a tilt in the Fed bias will change to becoming a little more dovish when Kevin Walsh is seated, if in fact that does happen and he is confirmed by the Senate.
Yeah, if I'm honest, I don't I think what all that rhetoric illustrates how split the Federal Reserve is.
And I don't think that will change unless the the hawks we saved, unless they only become dovish if they got the data to back that up.
So at the moment, I mean that UFE Chair Powell's dealing with a split.
Um and I think Kevin Walsh will be no different.
I mean, all you're doing is you're changing one person.
Yes, that person has a strong influence over the policymakers, but at the end of the day, they make their own decisions.
You look at the dot plot.
It's always been very split.
So there are sort of two camps.
Um, and I think that will remain certainly for foreseeable future.
I said for those hawks to become doves, I think they'll go not that they won't, but they go, I needed more evidence than they're presently seeing, is what they're saying.
And that I think is fair at the moment.
Okay, David, we'll leave it there.
Good stuff as always.
Thank you so much.
David Finnerty, Bloomberg's strategist, joining from Singapore here on the Daybreak Asia podcast.
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Welcome back to the Daybreak Asia Podcast.
I'm Doug Chrisner.
We moved to China next, and the latest readings on inflation.
Consumer prices were up last month, less than expected.
We had CPI rising at an annual rate of two-tenths of one percent.
However, producer prices dropped at an annual rate of 1.4%.
We got reaction from Robin Shing.
Robin is the chief China economist at Morgan Stanley.
He spoke with Bloomberg TV host David Inglis and Min Min Low.
There is no signs of decisive reflation.
If you strike that out, anything in the core services remained very weak due to insufficient domestic demand.
PPI improved a little bit, but I think it's just mechanical.
If you look at the PPIs due to commodity price, it's all contributed by global factors.
It's not a demand-led turn in China because we see no path through from this upstream commodity price to downstream or consumer goods.
So there is no decisive reflation yet in China.
I'm wondering when you talk about PPI, actually, if you pull out and look at the longer term, it's steadily been improving since maybe middle of last year.
And some economists think we could see positive PPI somewhere, maybe middle of this year.
Do you think that's possible?
Well, if you think about the big picture, China needs to reflate.
They need to do three steps.
Step one, don't add the new capacity in these oversupplied sectors.
They started to do that, anti-involution.
Step two, cutting excess capacity.
They haven't done much.
There is very limited progress on that front due to job concerns or debt concerns.
Finally, boost consumption, particularly boosting it in a sustainable way, not just cash for clunk subsidy, but try to provide a better upgraded social safety net to unlock consumption.
That part is also quite weak, right?
So that's why I don't see sustained reflation here.
And the PPI improvement you mentioned, I mentioned is uh mechanical, because global factors like dollar debase or global AI data center demand, that's helping the upstream price going up, but we don't see it's passing through to any of the downstream or consumer price in China that showed it's largely imported due to external factors, it's not uh China net reflation.
So the lack of let's okay, let's just call it uh d demand pull inflationary pressures.
It's it's that's really what matters, right?
And that's really what keeps the thing sustainable.
That's the backdrop.
I'll bring in two other stories recently.
There's the conversation from VAT and the stronger currency.
Both of those things are counter inflation.
Well, the other one, actually, if you add inflation, it's not the perhaps the best time to do that.
Where do you think those two stories fit into the inflation picture?
Well, the VAT debate is uh interesting story.
Uh, your colleagues did uh great coverage on that.
Um that day when they moved on the telecom VAT, you know, from 6% rate to 9%.
Right.
Um, a lot of investors were concerned that this could become a broad-based VAT hikes, not just this left pocket, right pocket in uh SOE-dominated telecom business.
But also maybe reaching out, going after private firms in internet platforms, e-commerce, gaming on VAT hikes.
We don't think they will do that because it's counterproductive, it's bad for reflation, is hurting confidence, and it's inconsistent with the macro consistency review framework.
But investors are concerned due to legitimate reasons.
We think in the upcoming National People's Congress in March, they may set the fiscal deficit ratio at the same level of last year.
So if the economy is in deflation, you actually need more proactive fiscal policy, expanding fiscal deficit, be it the headline deficit or the broad augmented deficit.
If you keep it stable, because government revenue is going to underperform during deflation, revenue as percentage of GDP may decline.
Right.
And deficit keeps stable, that means spending power to support the economy, support consumption will be limited, right?
So investors have a point.
Maybe the government need to collect more revenue by hiking some tax rates, but that's counterproductive during deflation.
So that's why I think if they keep a modest, stable deficit ratio, it's probably not decisive reflation efforts.
But I do think if first half growth under delivered, they may do a top-up in this fiscal package by second half of this year.
Okay.
In the order of maybe 0.5% of GDP, you know, less than one trillion remain B targeting consumption or housing support.
To your point about fiscal policies, right?
I think so far all the signs this year showed that the government is pulling back significantly in terms of consumption subsidies.
Last year is 300 billion yuen, this year 60 over a billion yuan.
And you mentioned the social safety net as well.
What do you think is holding the government back from decisively pumping in more fiscal policies here?
I think old habits die hard, right?
They try to be restrained on how much debt they want to raise, how much deficit they want to expand, partially due to the concerns if you do too much debt expansion, it's bad for the future.
But also how you spend the debt.
China was used to the supply-centric business model, spending it on infrastructure capex or manufacturing upgrade.
Um but we know in some areas it's already oversupplied, infrastructure or industrial capacity, so they have to shift the pattern of the spending mix from investing in physic physical goods to investing in human capital, like social welfare.
But these are all multi-year journey of reform.
I don't expect that they can do a big band reform this year.
It may be the start of the next five-year plan, emphasizing the upgrading of a social safety net, but it will take some time.
So to your question, fiscal policy is still restrained because there are still a lot of old habits, and old habits die hard.
Some of the old, let's call it old habits to borrow your the concept you just raised there is an exercise in setting GDP and growth targets, right?
And we've heard from many provinces recently over their individual targets for 2026.
How does the how do those targets inform you uh over what the aggregate economic growth target is going to be at the MPC and what they'll tell us then?
Yeah, we closely monitor how this local MPC from each province or cities are tracking on GDP target.
Um most of them trimmed the target, so on average, they lowered the target of last year's 5.5% to 2026 5%, around 5%.
So that probably showed uh na national target will also be around 5%.
I don't think it's a downgrade.
It's more like becoming more practical.
Uh if they can tolerate slightly slower growth, uh instead of doing all-ing for capex to reach that 5% or above growth target, this tolerance of slight of slightly slower growth is actually good for quality rebalancing efforts.
Because if they need to shift the spending from supply side to consumer welfare, that will take time.
And in very near term, that may mean you have to tolerate a slower GDP target because it's always easier to anchor growth with infrastructure capex.
While it may take longer, harder to change people's behavior on consumption.
So I do take, you know, 10 out of this top 15 provinces lower the GDP target.
That's probably a good sign.
They are becoming more practical.
We have seen with the dollar slide, right?
The UN has been pushing towards 6.9, and there has been expectation that this momentum would continue throughout the year.
But at the same time, this would worsen deflation, right?
So how much do you think the PBOC would allow the UN to continue strengthening?
If you ask 10 economists on their forecast of Remin B today, I think 10 out of 10 will be bullish.
I am not one of them.
The reason is the China is ink deflation and a stronger currency in a sustainable fashion is counterproductive for reflation.
It could make the PPI deflation even worse, uh, squeezing profit margins for firms.
So it's against the reflation goal.
Of course, now people are looking at near term, I mean B has been strengthening.
That's not a Remin B story.
That's largely a dollar story.
I just look at your screen, dollar index is continue to weakening, and that's a dollar beta story.
It's not a Reming B alpha story.
In fact, the PBOC probably prefer by maintaining the Gemin B against its basket at a stable level.
The CFI's basket will largely park at that around 100 million.
Uh that's the stability they are looking for.
When dollar is strengthening, Remin B will weaken against the dollar.
When dollar is weakening, just like now, dollar Remin B will strengthen, but it's not a Remin B alpha story.
Because they know that when they have domestic deflation problem, if you have a sustainable refl uh appreciation of the currency, it's actually making PPI deflation worse, making profit margins of corporate worse.
So I don't think they are looking for a stronger sustainable appreciation of the UM.
No.
Do you think that's going to be the story of 2026?
That the economy is not bad enough to merit, short-term stimulus, stick to the structural story, but not good enough that it's not going to fuel this earnings rally that most equity strategists are now tying to a sustained rebound in the equity market.
Well, you all deluxe economy.
I think the theme for 26 will be similar to 25.
Micropositive, macro challenging.
So it's a slow burn in China's radio uh long-term reflation process.
Macro is still challenging, particularly these uh macro sensitive effects, housing, consumption.
But micro, you can see a lot of positives on tech, AI supply chain, uh, biotech, uh, advanced manufacturing.
So this is definitely the area investors I met have been re-engaging with China.
It's more on this micro positives, but on macro, people are still cautious.
That was Robin Shing.
He is the chief China Economist at Morgan Stanley, speaking there to Bloomberg's David Inglis and Min Min Lowe, bringing you their conversation here on the Daybreak Asia podcast.
Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition Podcast.
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