Forex: Australian Dollar Soars as China Reveals Yuan Regime Overhaul

Talking Points:

Aussie Dollar Soars as China Unveils Key Exchange Rate Policy Changes
Yen Gains on Haven Demand as Nikkei Falls, Fed-Speak the Likely Culprit
Euro Looks Unlikely to Find Strength in Another Firm German ZEW Report

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The Australian Dollar soared as an article written by PBOC Governor Zhou Xiaochuan last week’s third CPC plenum. The central bank chief outlined a sweeping reform agenda, saying China will widen the Yuan’s trading band as it works to set up a managed floating exchange rate and “basically” remove itself from day-to-day FX interventions. Perhaps most shockingly, Zhou said the PBOC will cut the ratio of Treasury bonds that it holds to maturity, potentially undermining structural demand for USD-denominated assets from the US’ largest overseas creditor. He likewise pledged to open up the capital account (albeit with temporary curbs) and gradually expand market-based debt product pricing.

The Japanese Yen advanced on the back of safe-haven demand as the Nikkei 225 declined. The benchmark stock index closed down 0.25 percent. Export-oriented sectors and financials bore the brunt of the selloff, suggesting hawkish comments New York and Philadelphia Fed Presidents Bill Dudley and Charles Plosser may have been the culprit behind the Nikkei’s drop as traders speculated on the possibility of a relatively sooner move to “taper” QE asset purchases. We noted yesterday that the two policymakers’ remarks may reflect a sanguine attitude, pushing against bets on a prolonged delay of QE reduction and set the tone for the publication of minutes from October’s FOMC meeting later this week.

Plosser said the failure to begin scaling down the program in September undermined the Fed’s credibility, arguing that policymakers can’t continue to “play the bond-buying game by ear”. Rather than tailoring QE to the ups and downs of the economy, he urged setting a fixed amount on total QE3 purchases to lend certainty to the policy framework. Dudley – a typically dovish voice on the rate-setting FOMC committee – said he was “more hopeful” about the US recovery amid waning fiscal drag and predicated “more substantial improvement” in the labor market. He even added that it is “very important” for the Fed to avert asset bubbles, a nod to the argument that QE has unreasonably inflated valuations.

The German ZEW Survey of investor confidence headlines the economic calendar in European hours. The forward-looking Expectations index is expected to rise to 54.0 in November, marking the highest print in over four years. The outcome may not do much to buoy the Euro however considering it may reflect optimism about the pick-up in the ECB’s easing efforts rather than foreshadow a firmer policy stance. Another busy day of official commentary is ahead in the US. President Barack Obama and Treasury Secretary Jack Lew are scheduled to speak to the Wall Street Journal CEO Council while Fed Chairman Ben Bernanke will speak to the National Economists Club.

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Asia Session:

GMT

CCY

EVENT

ACT

EXP

23:00

AUD

Conference Board Leading Index (SEP)

0.3%

-0.2%

0:30

AUD

RBA Minutes from November Policy Meeting

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