Back
18 Dec 2015
Fed vs. PBoC - Rabobank
FXStreet (Delhi) – Jane Foley, Research Analyst at Rabobank, suggests that the decisions by the monetary authorities in Hong Kong and Mexico to follow this week’s Fed tightening with interest rate hikes of their own has not raised too many eyebrows.
Key Quotes
“The Hong Kong monetary authorities maintains a USD peg, at least for the time being, while the Mexican central bank has already drawn down its reserves this year in an effort to protect the peso vs. the USD. In contrast, the decision by the Taiwan central bank overnight to adjust policy was not fully anticipated. Nor was the announcement by the BoJ to make technical changes to its QQE programme. In contrast to the policy direction of the Fed, the BoT eased monetary conditions further overnight. The BoJ announced measures aimed at promoting the transition of policy stimulus.”
“Geographical location ensures that the Mexican economy is overwhelmingly focused on the US. For economies such as Japan and Taiwan, however, China is a more important trading partner. While slowing growth in China is not a new headwind, it is possible that China’s trading partners have been rattled by the PBoC’s statement last week which focused attention on China’s effective exchange rate. This has risen this year as value of the yuan has been dragged higher against a basket of currencies by its de facto USD peg. Despite the August 11 devaluation, the CNY is the third best performing Asian currency this year.”
“In view of slowing growth and weak price pressures in China, it is not surprising that the PBoC is concerned by the relative strength of its exchange rate. This morning the yuan was guided lower vs. the USD for the tenth consecutive session. Although there is speculation in the market that the PBoC will be keen to control the pace of addition falls in the value of the CNY potentially for fear of spooking investor confidence, we do expect the yuan to weaken vs. the USD during the course of 2016 in order to support the wide range of stimulus that the Chinese authorities have been pumping through the system.”
“A weaker CNY could have significant implications for China’s trading partners. If China is successful in weakening the value of its exchange rate, then the central banks of its trading partners could be forced into taking retaliating action. This means that the easing cycle of many central banks could be extended. Dependent on how events pan out, the Fed could even be forced to rein back the pace of its rate cuts in order to prevent the value of the USD rising too rapidly on the back of a new phase of currency wars.”,
“Although the BoJ made no changes to its existing QQE policy target overnight, it did alter the composition of its asset purchases. The BoJ has indicated that it will introduce some steps to supplement QQE which will include measures to support firms’ investment in physical capital. This is in line with the BoJ’s commitment to encourage Japanese firms to increases the wages of their workers in order to promote consumption demand and inflation potential. In recent months BoJ Kuroda has indicated little desire to ease policy further but the broad-based falls in the value of the yen in 2013 and 2014 combined with the current strength of the yuan have taken the value of Japan’s effective exchange rate to its lowest level since the 1970s (BoJ measure).”
“Any tightening in Japanese monetary conditions as a result in a rise in JPY/CNY may make the BoJ more responses to further easing in the New Year. Similar logic can be applied to the ECB and to other central banks that export heavily to China such as the RBA and the RBNZ. Irrespective of this week’s Fed tightening, the influence of China could mean the easing cycles of several central banks is a long way from being over.”
Key Quotes
“The Hong Kong monetary authorities maintains a USD peg, at least for the time being, while the Mexican central bank has already drawn down its reserves this year in an effort to protect the peso vs. the USD. In contrast, the decision by the Taiwan central bank overnight to adjust policy was not fully anticipated. Nor was the announcement by the BoJ to make technical changes to its QQE programme. In contrast to the policy direction of the Fed, the BoT eased monetary conditions further overnight. The BoJ announced measures aimed at promoting the transition of policy stimulus.”
“Geographical location ensures that the Mexican economy is overwhelmingly focused on the US. For economies such as Japan and Taiwan, however, China is a more important trading partner. While slowing growth in China is not a new headwind, it is possible that China’s trading partners have been rattled by the PBoC’s statement last week which focused attention on China’s effective exchange rate. This has risen this year as value of the yuan has been dragged higher against a basket of currencies by its de facto USD peg. Despite the August 11 devaluation, the CNY is the third best performing Asian currency this year.”
“In view of slowing growth and weak price pressures in China, it is not surprising that the PBoC is concerned by the relative strength of its exchange rate. This morning the yuan was guided lower vs. the USD for the tenth consecutive session. Although there is speculation in the market that the PBoC will be keen to control the pace of addition falls in the value of the CNY potentially for fear of spooking investor confidence, we do expect the yuan to weaken vs. the USD during the course of 2016 in order to support the wide range of stimulus that the Chinese authorities have been pumping through the system.”
“A weaker CNY could have significant implications for China’s trading partners. If China is successful in weakening the value of its exchange rate, then the central banks of its trading partners could be forced into taking retaliating action. This means that the easing cycle of many central banks could be extended. Dependent on how events pan out, the Fed could even be forced to rein back the pace of its rate cuts in order to prevent the value of the USD rising too rapidly on the back of a new phase of currency wars.”,
“Although the BoJ made no changes to its existing QQE policy target overnight, it did alter the composition of its asset purchases. The BoJ has indicated that it will introduce some steps to supplement QQE which will include measures to support firms’ investment in physical capital. This is in line with the BoJ’s commitment to encourage Japanese firms to increases the wages of their workers in order to promote consumption demand and inflation potential. In recent months BoJ Kuroda has indicated little desire to ease policy further but the broad-based falls in the value of the yen in 2013 and 2014 combined with the current strength of the yuan have taken the value of Japan’s effective exchange rate to its lowest level since the 1970s (BoJ measure).”
“Any tightening in Japanese monetary conditions as a result in a rise in JPY/CNY may make the BoJ more responses to further easing in the New Year. Similar logic can be applied to the ECB and to other central banks that export heavily to China such as the RBA and the RBNZ. Irrespective of this week’s Fed tightening, the influence of China could mean the easing cycles of several central banks is a long way from being over.”