The Highlights:
- Fed creates more commotion; but low rates are here to stay
- China signals looser grip on the yuan
- Iran nuclear deal - another blow for oil
Fed creates more commotion; but low rates are here to stay: A
week after Yellen's uber-dovish Senate testimony reassured markets, the
Fed dropped another bombshell that sent dollar bears scrambling for
cover for the n-th time this year. This time, it was the minutes from
the FOMC's end-of-October meeting, which implied that tapering (i.e. a
scaling-back of the Fed's monthly money printing) was just around the
corner, and could even begin in December. Market observers, who had
pushed back their projections for the start of tapering to March, were
caught off guard. But before reading too much into this, let's step back
and think about what tapering means. It merely slows the pace of
the Fed's money printing, it doesn't reverse it. Even once the Fed
stops printing, that doesn't mean its near-$4 trillion balance sheet
will shrink. No, the Fed - especially under the leadership of a dove
like Yellen - will not risk a still-sluggish economic recovery by
tightening anytime soon. All the liquidity pumped into the markets
over the past five years will stay, and the era of the ultra-low fed
funds rate will continue. So don't come rushing back into the dollar!
China signals looser grip on the yuan: Early
in the week, China's central bank governor Zhou Xiaochuan was quoted as
saying that the world's second-largest economy would "basically" end
currency intervention, and that the case for stockpiling FX reserves is
no longer as strong as before. What does this mean? Well, as a refresher
on what China has been doing in the past: for years, due to perennial
trade surpluses and capital inflows, dollars had been flowing into China
en masse, putting upward pressure on the yuan. To counteract
that, Zhou's People's Bank of China printed new yuan to soak up all
those dollars coming into the country, thereby artificially weakening
the RMB. Importantly, because a lot of the reserves were recycled
into US Treasuries, it kept the US federal government's cost of
borrowing at manageable levels. Now, with China trying to reform its
economic model, Zhou appears to be hinting that China will at least
ease up on the policy, allowing the yuan exchange rate to be more
market-driven (read: appreciate even further). True, this could lead to
some short-term pain for Chinese exporters, but they're not the ones who
should be most worried. That distinction belongs to
the congressional lawmakers and Mr. Obama halfway around the world in
DC. Why? With the end of Chinese reserve accumulation, financing the US
twin deficits has become that much harder.
Iran nuclear deal - another blow for oil: Over the weekend, the five UN Security Council members plus Germany reached what was hailed as a landmark agreement with Iran. After years of confrontation and hostility, an agreement came into being that would loosen sanctions on Iranian exports of precious metals, in return for the Islamic Republic restricting its uranium enrichment activities. While the agreement is modest in scope (and does little to free up Iranian oil exports to the West), it marks a remarkable change of tone between Iran's new moderate President Rouhani and the Western powers. Suddenly, the specter of war in the Middle East and the Persian Gulf has diminished (notwithstanding some saber-rattling from Israel). Speculation leading up the agreement had already put significant pressure on oil, with WTI crude falling below $95 during the week. Coupled with the Obama administration's backtracking from intervention in Syria, and the fracking boom in the US, the "perfect storm" for oil only looks set to continue for now.
No comments:
Post a Comment