December 10, 2023

China may ease monetary policy in Q1 despite hawkish Fed, and that’s AUD/USD negative

A Chinese article by Chinese agency China Economic, ‘CE’,  is doing the rounds that say the minutes of the Fed’s December 2021 meeting was like a blockbuster “bomb” affecting markets in the Asia-Pacific region.

The article in the Chinese news agency website states that the Chinese renminbi exchange rate may become an important balancer for internal and external equilibrium, and exchange rate flexibility is expected to further increase.

Key notes (translated on Google Translate)

”Amidst the changes, the “self-oriented” characteristic of China’s monetary policy will become more prominent.”

”Institutions generally believe that domestic monetary policy in 2022 will not follow overseas tightening. Not only that, under the requirement of “more proactive and promising”, there is a high probability that monetary policy will be further loosened on the margin, and there is a possibility of reducing the RRR and interest rates in 2022.

This also means that in the future, the spread between Chinese and foreign interest rates is likely to narrow, which in turn may have a certain impact on capital flows and asset prices.”

”Some organizations believe that my country’s proactive fiscal policy will enhance efficiency and play a more critical role in stabilizing the macroeconomic market.”

”Monetary policy needs to grasp the rhythm and intensity, make good use of the “time window” before accelerating overseas tightening, and move forward. At the same time, the RMB exchange rate flexibility should be strengthened, and the functions of exchange rate adjustment macroeconomic and balance of payments automatic stabilizer should be brought into play.”

Market implications

This is good news for Asia-Pac markets but a potential headwind for the Aussie should the central bank divergences continue to play out as follows:

AUD/USD slams into weekly support ahead of critical NFPs

”The Fed’s communication meant that there will be a much quicker timeline between rate hikes and balance sheet runoff than the last time, as such, it is full steam ahead with respect to the central bank divergences. Overall, that spells a lower Aussie for the weeks ahead which leaves the weekly technical outlook intact as follows:

On a break of weekly support, near 0.7150, the prospect of a downside continuation will be in play. Meanwhile, there is room for a correction to the old daily support near 0.72 the figure.”

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