Divyang Shah, Senior IFR Strategist
While the Fed is preparing markets for an eventual removal of accommodation, the PBOC has been engaging in actual tightening. By not relenting and providing money markets with liquidity relief, the PBOC has managed to set some records on money market rates.
Unlike the Fed, which is looking for the data to help it shift towards tapering, the PBOC is willing to stomach higher rates in order to punish banks at a time when China’s growth outlook has been downgraded.
Whether it’s the Fed QE tapering or PBOC’s liquidity policy the impact will be felt more by commodity and EM investors. It seems likely that US dollar strength against EM currencies will continue with c/a deficit currencies suffering the most.
The AUD/USD is the barometer to keep an eye on for risks related to Fed QE and China.
