China Fails to Dazzle, Adds Pressure to High Beta FX

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Two primary factors are driving high beta currencies lower against the U.S. dollar today – the continued rise in Treasury yields and China’s failure to dazzle the markets with its reform policies. Since no major U.S. economic reports were released this morning, investors leaned back on the less dovish comments from Dallas Fed President Fisher who called recent job numbers not that bad and said monetary accommodation grows riskier by the day. While Fisher is not a voting member of the FOMC this year, his views should not be ignored because he votes in 2014. Fed Presidents Kocherlakota and Lockhart speak later this afternoon and if they also express concerns about the current level of monetary policy, Treasury yields could extend higher, lending support to the greenback. If 10 year bond yields hit 3%, USD/JPY should trading above 100.

Last night, China ended its 4 Day Third Plenum and failed to live up to the market’s lofty expectations. Had China announced a grand sweeping reform plan that dazzled the markets, global equities would be performing better and high beta currencies such as the Australian and New Zealand dollars would have risen strongly. Unfortunately the government’s announcement was short on details, making investors worried about how much of the plan has been worked out. What we know is that the government hopes to show “decisive results” with their reforms by 2020. Their goal is to “straighten out the relationship between government and the market, allowing the market to play a decisive role in allocating resources and improving the government’s role.”

The market was looking for specifics and China gave nothing more than generalities. The government promised general fiscal and financial reform as well as greater property rights and equal access to public services. Unfortunately everyone was hoping for specific changes to controls over interest rates and the flow of capital as well as land title and property rights for farmers. Economists were also looking for major reforms to state-owned enterprises but China only acknowledged the importance of both state and private companies. More details on their policy plans will be released in the coming days and hopefully China will finally deliver on their promises of grand sweeping reforms because a stronger China benefits the world.

In the meantime, forex traders should keep an eye on U.S. yields. Kocherlakota and Lockhart are scheduled to speak on monetary policy at 1pm ET / 18 GMT and their bias could extend the gains or reverse the rise in the dollar.

Kathy Lien
Managing Director

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