Fed’s aggressive move makes PBOC even slower in further easing14 September, 2012, 12:57. Posted by Zarathustra
The Federal Reserve’s latest move to engage in open-ended quantitative easing is quite a huge move, and as pointed out, the new MBS buying programme will buy more than half of all new agency MBS issuance every month.
Earlier, we said that with the ECB’s OMT which pushes the tail risk away (for the time being at least) has pushed risks and Euro higher. With aggressive monetary easing from the Fed, the US dollar has been weakening. The question, of course, is how long this can last. Set that issue aside for a second, however, aggressive moves of the central banks of the US and the Euro area is going to be helpful to China as well. However, these are going to make the hesitant PBOC even more hesitant in monetary easing.
The weakness of US dollar will probably encourage funds flow into countries like China, which could reverse the trend of consistent outflow which has been happening for many months now. As far as PBOC’s own balance sheet is concerned, the return of funds flow means that there is a chance that its long-used mechanism of base money creation through FX intervention, which was broken for a few months by funds outflow, might be probably back in business again.
The chart below shows two things. First, the difference between closing price and PBOC daily fixing of USDCNY, and second, the difference between PBOC daily fixing and the previous day’s closing price of USDCNY. Since the last quarter of 2011, we have seen periods where PBOC set Chinese Yuan stronger than the market thought it should be, implying weaker demand of Chinese Yuan (possible outflows), and this has become very consistent from May this year until the recent days, where PBOC sets Chinese Yuan at a weaker rate than the market thinks it is.
Of course, the fact that funds flow is now giving an easing bias towards Chinese monetary policy instead of tightening (as it did for many months now) does not in anyway mean that the country suddenly has no need to rebalance its economy or anything like that. The issues are still there. For as long as this positive impact last (which we cannot tell how long), it is going to help China to stabilise growth in the short-term.
However, given the expectation of home prices rising hitting recent high and as inflation expectation is back on the rise, while the Fed is helping PBOC to ease, we suspect that PBOC might become even slower in further easing.
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