High Beta FX Supported by Chinese Reform Details

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Most major currencies are trading higher this morning against the U.S. dollar on the back of rallies in Asian and European equities. Investors are optimistic about the outlook for China after the government released its reform plan details. While the most talked about announcements are relaxation of the one child policy and end to labour camps, China also gave farmers greater rights, promised to proactively develop mixed ownership, allow employees to hold shares in those companies, allow non-state investment into state projects, set up free trade zones, exempt most corporate projects from government approvals and transfer 30% of profits produced by state owned enterprises to public finances to improve the well being of their citizens. The goal is to make China’s growth more sustainable and based on the reaction in equities and currencies investors believe that encouraging private investment will help stabilize China’s economy.

Weaker than expected U.S. data added to gains in the euro, British pound and other high beta currencies. EUR/USD breached 1.35 for the first time this week while GBP/USD rose firmly above 1.61. USD/JPY gave up part of its earlier gains but is still trading above 100. According to the latest economic reports, the recovery in the U.S. manufacturing sector is losing momentum. Economists had been looking for an improvement in the NY region but instead the Empire State manufacturing index declined to-2.21 from 1.52, the first contraction since May. Industrial production also fell 0.1% in October after growing 0.7% the previous month. In addition, import prices dropped 0.7% last month, validating Janet Yellen’s belief that inflation is not problem at this time. Aside from justifying Yellen’s concerns about the U.S. economy and her overall dovish bias, today’s economic reports also reduces the chance of tapering in December.

Treasury yields lost their earlier gains but with the Nikkei up another 2% overnight USD/JPY should be able to hold its breakout above 100. U.S. rates are still expected to press higher in the coming months, so any pullback in USD/JPY can be viewed as an opportunity to come in at lower levels. The next resistance level in USD/JPY is the September high of 100.60.

Kathy Lien
Managing Director

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