China factor weighed on the Fed – Deutsche Bank

FXStreet (Delhi) – Research Team at Deutsche Bank, suggest that Yellen was unusually verbose about the risks to EM and the impact of China, with concerns about the strength of the USD also in her mind. Our China strategist Zhiwei Zhang believes that China macro is turning a corner, but this is also a world turned upside down.

Key Quotes

“Chinese equities used to soar on easing and decline when the economy picked up and conditions were tightened. The last few months have broken that trend, failing to rally as the liquidity injections accelerated. Should Chinese equities now pick up if the economy rebounds and what is the expected longevity of the rebound? China may just be a symptom of the wider malaise in that we have passed the condition of peak USD liquidity.”

“Global USD conditions have tightened. These conditions may decelerate, but they will not reverse. Global growth is weaker than US growth. That is a drip drip strong USD. US growth is subdued for the same reasons that global growth is subdued, which are the same reasons that China and EM have begun to reverse their reserve surpluses and the BoJ and ECB have been attempting to QE themselves back into growth.”

“If the Fed do see fit to raise rates this year, it will re-accelerate the trend. Rates maybe too low for the current level of growth and it maybe nice to remove the "will they, won't they" uncertainty, but the backdrop is not supportive of regime change.”

“They missed that window sometime ago when they refreshed QE when inflation expectations were rising. Now they are stuck with a dots matrix that establishes their collective inability for credible forecasting, whilst stranded on a lower bound of near zero interest rates, which for one member, now also appears to be too high.”