Forex- Dollar Falls As China Considers Slowing US Bond Purchases

13 January, 2018, 00:59 | Author: Kelly Sanders
  • Stock Rally Tested by Rise in Yields; Yen Climbs: Markets Wrap

The yield on the benchmark 10-year Treasury note fell to 2.531 percent at 2:33 p.m. ET, while the yield on the 30-year Treasury bond fell to 2.862 percent.

The yield curve between two-year notes and 10-year notes US2US10=TWEB was last flatter at 58.6 basis points, after steepening to 62.4 basis points earlier Wednesday.

There have been far more severe storms in recent years.

Brent crude futures LCOc1 settled 6 cents higher at $69.26, after hitting $70.05 during the session, its highest level since November 2014.

None proved to be the turning point and world markets kept on keeping on.

The dollar rose against its Canadian counterpart and and Mexico's peso after a Reuters report said Canada increasingly believes that U.S. President Donald Trump will soon announce his intention to withdraw from the North American Free Trade Agreement treaty.

There's little to suggest the equity juggernaut is about to reverse either, at least not yet, with Wall Street chalking up its best start to a year since 1987 (and even though Black Monday on October 19 that year was the worst day in USA market history, Wall Street still ended 1987 in the green).

Overnight jitters in global bond markets triggered a flare-up in investor caution that knocked the Australian sharemarket lower again today.

When compared with real yields, which account for inflation, stocks aren't "particularly expensive", according to the Bank for International Settlements.

A forthcoming decision from Washington over whether to impose sanctions against China for its trade practices and alleged failure to enforce global sanctions against North Korea may also have been at play. The yuan gained around 6.8 percent versus the dollar previous year. The currency traded at $0.7867 USA, which compared to levels around the $0.783 handle seen before the release.

"With all that said, and similar to our views from a year or so ago, it remains premature to declare beginnings of bear markets", he added.

There's that. And then there's also the central bank's counter-measures should bond yields continue to rise amid low inflation - knowing that it had worked in the past, central banks would have no misgiving about reinstating bond buying.

The report, which Bloomberg News published on Wednesday, suggested that China's State Administration of Foreign Exchange (SAFE) had recommended slowing or halting purchases of the us government bonds, citing reasons that included investment alternatives and trade tensions with the U.S.

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It is true that China is one of the biggest external holders of U.S. treasuries, along with Japan, which means that they do have enormous influence over how the market can and does move.

ING Bank Greater China economist Iris Pang said it would be no surprise if China wanted to revise its foreign reserves portfolio when global investors started to walk away from US Treasuries whose issuance cost could increase after the tax cut in the US.

SAFE officials noted that "the handling of China's foreign reserves investment in U.S. bonds is professionally managed according to market activity, on the basis of market conditions and investment needs".

In recent years Beijing has held its foreign reserves at roughly the same level and has not been actively increasing purchases of US debt.

What was the market fallout?

In the past two weeks, two of China's star companies, Ant Financial and Huawei, have met setbacks in the U.S. market where their investments were being obstructed, triggering a wave of mainland Chinese state media criticisms against the USA government for its "protectionism". Wall Street survived a wobble in late 2015-early 2016 to rise 25 percent.

That marked a turnaround after China burnt through almost US$320 billion in 2016 to defend the yuan, which fell 6.5 percent against the surging dollar.

The world's second largest economy has long invested heavily in U.S. bonds as a way of controlling the value of its own currency the yuan.

Meanwhile, demand for USA and other high-grade sovereign bonds is as strong as ever. The Fed holds $3.015 trillion of Treasuries for other central banks, down from $3.052 trillion in September.

Forced out of sovereign debt by the quantitative easing of central banks bond purchases and into riskier assets such as corporate and high-yield bonds, private sector investors are now underweight government bonds relative to where they would have been in QE's absence, reckons Deutsche Bank.

Their bid for bonds is relatively price-insensitive.

With the euro zone seeing its best growth in a decade, the European Central Bank should gradually shift its stance to avoid a more disruptive move later and look at a broader revision of its policy guidance to reduce the focus on bond purchases and raise the emphasis on interest rates, accounts of the ECB's December meeting showed.

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