Just as anabolic steroids are to bodybuilders, fiscal and monetary stimuli have been the lifeline for markets and the economy. Over the decades, nation-states have relied heavily on these fiscal injections to buff up markets and respective economies.
Now, to the delight of BTC and risk asset bulls, China, the world’s second-largest economy, and European Union’s heavyweight Germany have announced fresh fiscal bazookas. That might help calm crypto and traditional market nerves about the negative impact of the Trump administration’s plan to reduce spending and the President’s tariffs policies.
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The National People’s Congress opened in Beijing today, targeting 5% GDP growth for 2025 while raising the fiscal deficit target to 4% of GDP, a full 100 basis points higher than the previous year’s 2% target.
“An increasingly complex and severe external environment may exert a greater impact on China in areas such as trade, science, and technology,” Premier Li Qiang said in his speech.
Notably, the plan showed that boosting domestic demand and consumption has become a top priority, in line with Beijing’s long-term plan to be a more consumer-driven growth model than an investment-driven one.
The decision to maintain the 5% target indicates that “policymakers continue to have confidence in stabilising growth despite stronger external headwinds,” ING said.
Meanwhile, early this week, Germany said it would unlock hundreds of billions of euros for defence and infrastructure investments, abandoning its famed fiscal rectitude.
“The massive shift in fiscal policy likely gives the struggling German economy a shot in the arm. A jump in defence spending might provide a cyclical boost, the proposed infrastructure package could deliver notable potential output gains in the long run,” Bloomberg economists said.
Asian and European equity markets rallied early today, cheering the fiscal bazooka from China and Germany. Bitcoin, too, has risen nearly 3% to $90,000, having defended the 200-day average Tuesday.
Aside from potentially compensating for any fiscal tightening in the U.S., China and Germany’s fiscal plan could also work its magic through the FX channel by putting the dollar under pressure.
When a country increases its borrowing, it typically signifies that bond supply will rise, placing downward pressure on bond prices and driving yields higher. This, in turn, enhances the appeal of the domestic currency.
That’s already happening. Germany’s 10-year bond yield has jumped 36 basis points to 2.73% since Feb. 25, reaching the highest since November 2023, according to charting platform TradingView. As such, the spread between yields on the 10-year U.S.-German government bond yields has tanked to 1.49% in the USD-negative manner, hitting the lowest since September and down significantly from the high of 2.31% in December.
The narrowing of the yield spread has lifted the EUR/USD, the most liquid FX pair, spurring a broad-based USD selling and pushing the dollar index below 105.00 for the first time since November.
Weakness in the greenback, a global reserve, tends to ease financial conditions worldwide, spurring increased risk-taking in financial markets.