FX Daily: Caught between China and the US

No signs of synchronized global recovery.
Philip Wee22 Sep 2021
    Photo credit: Unsplash Photo

    Wall Street’s attempt to recover from the Evergrande-led sell-off petered out quickly. Dow and S&P 500 ended Tuesday lower by 0.2% and 0.1% respectively. The VIX volatility index stayed firm above 24 for a second session. Optimists looking to buy on dips argued that Evergrande will not result in a Lehman moment. China has been silent throughout the sell-off during its holiday on Monday. S&P Global Ratings believed that any direct support for Evergrande will only materialize if the crisis threatens other property developers and pose systemic risks to the economy. Put simply, the crisis will need to deepen before Evergrande is considered “too big to fail”. Until then, China is likely to ensure ample liquidity during its quest to reduce and prevent risks not only in the property sector but also Big Tech, fintech and other private enterprises.


    US 10-year treasury yield firmed to 1.323% from 1.311% ahead of the FOMC meeting today. The Fed is expected to provide more clarity on whether it will taper asset purchases in late 2021 or early 2022. The Fed is likely to take the view that the significant improvement criteria had been met for the taper but not rate hikes. The Summary of Economic Forecasts should affirm the resilience of the US economy to the Delta-variant amidst persistently high inflation, and a jobs recovery that looks past the latest miss in nonfarm payrolls. Overall message will be that it is time to start rolling back the pandemic measures with the assurance that monetary policy will remain accommodative to ensure a recovery still surrounded by uncertainties.


    Like after the global reflation trade in 2017, global markets are caught between the world’s two largest economies after last year’s Covid rally. Although there is no repeat of the US-China trade war in 2018-19, relations between the two giants remained cold. Apart from dealing with China’s regulatory clampdowns on the growth front, investors worry that the Fed and other major central banks are also paving the ground to pull back their monetary support measures next year before moving to hike rates from 2023. The synchronized global recovery story that fuelled the global market rally and USD sell-off after the Covid outbreak last year is becoming increasingly out of reach, especially for the rest of this year.

    Philip Wee

    Senior FX Strategist - G3 & Asia
    [email protected]

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