Forex: Markets Wait for China Plenum Outcome Amid Lull in Data Risk

Talking Points:

New Zealand Dollar Gains as RBNZ Policy Bets Firm After Spending Data
NZ Finance Minister Bill English Says Kiwi Expected to Fall vs. US Dollar
All Eyes on China Plenum as Party Leaders Hash Out Economic Reforms

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Most major currencies were little-changed in overnight trade. The New Zealand Dollar narrowly outperformed after data showed that Credit Card Spending surged 1.1 percent in October, marking the largest increase in four months. The report reinforced the markets’ robust RBNZ monetary policy expectations, helping the Kiwi higher. Traders are now pricing in 92 basis points in interest rate hikes over the coming 12 months according to data from Credit Suisse, amounting to the best one-year policy outlook in the G10 FX space. The New Zealand unit eased off session highs after Finance Minister Bill English said he expects it to weaken against its US namesake, helping to rebalance the economy.

The US and European economic calendars offer nothing by way of noteworthy of event risk. This puts the spotlight on the outcome of China and the outcome of the so-called Third Plenum, a sit-down of the ruling party’s top brass including President Xi Jinping and Premier Li Keqiangthat typically focuses on economic policy. Comments from Yu Zhengsheng, the number-four ranked politician in the current administration, pointed to “unprecedented” reforms to be unveiled. The range of possible issues on the docket is far-reaching and may include anything from financial sector reform (including foreign exchange liberalization) to changes in tax policy and land ownership rules.

Broadly speaking, the central theme of Mr Xi’s economic policy vision seems to be China’s transition from an export-driven to a consumer-based growth model. That makes sense: taken collectively, the West has been a relatively poor customer over the past decade. Consumption in China’s top rich-world export markets in North America and Europe has been hobbled by back-to-back crises over the past decade, starting with the Dot-com bust and continuing most recently with the Eurozone debt fiasco. Mr Xi has been frank about the growth implications of the transition, saying the pace of economic expansion is likely to slow.

With that in mind, the top concern for financial markets will be the extent to which the reforms adopted at the Plenum will impact near-term performance in the world’s second-largest economy. Signs of an accelerated slowdown bode ill for countries that depend on Chinese demand to fuel export demand (notably, Australia) and the global recovery at large, which may weigh on market-wide risk appetite.

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