Dollar higher after China announces reforms and Bernanke flags continued easy monetary policy

November 19, 2013

Beijing-China (Nov 20)  Yuan reforms still in early stages --- Analysts said while China was signalling less frequent intervention in the foreign exchange market, any major reforms of its approach to the yuan were still in the early stages.

"Everyone's assumption is that reforms will take place, but to put it pretty simply, today we are none the wiser than we were yesterday on terms of any timing. This is a long-term process that's likely to continue," Commonwealth Bank currency strategist Peter Dragicevich said of People's Bank of China governor Zhou Xiaochuan's comments.

"We had expected the Chinese to widen their daily trading band at some point. We thought it could happen possibly this year. But in terms of moving down that track we're still a long way away from all the reforms that are taking place."

Mr Breen said the Australian dollar could face more upside bias in the near-term as expectations increase that the Reserve Bank may have reached the end of its current easing cycle amid a boom in the housing market.

"I think the RBA are done for now. I think with them acknowledging house prices in the minutes [released yesterday], ... as much as they would love to have the Aussie down, I don't think they can really control what's going on there," Mr Breen said.

He added that the new 20-year government bond issue [LINK: /business/australian-office-of-financial-management-issues-20year-bond-20131119-2xtda.html], which raised $5.9 billion from investors, also pushed the local currency higher.

"It's the final bond issue for the year (of this Treasury bond) until April. So there would be probably be a fair few investors out there looking for that reasonably-nice chunky yield on triple-A-rated debt," Mr Breen said.

Lower US rates for lower

A delay in the raising of US interest rates could see the Australian dollar remain at elevated levels for a longer period of time, which could continue the headache for the Reserve Bank, NAB currency strategist Emma Lawson said.

Ms Lawson said the extraordinary monetary policy actions taken by some countries following the financial crisis, such as the use of quantitative easing, has meant all central banks have had to readjust their own policies.

RBA's assistant governor for financial markets, Guy Debelle, said earlier this month that the Fed's quantitative easing measures may have created problems for smaller economies.

Mr Bernanke said in his speech today that rates were "likely to remain near zero for a considerable time" after the end of the central bank's $US85-billion-a-month ($90.3-billion-a-month) bond-buying program.

He added that a "more robust recovery" of the US economy was the "surest path to a more normal approach to monetary policy".

"The FOMC remains committed to maintaining highly accommodative policies for as long as they are needed," Mr Bernanke said.

But he said that the quantitative easing program would be scaled back eventually.

"The FOMC still expects that labour market conditions will continue to improve and that inflation will move toward the 2 per cent objective over the medium term. If these views are supported by incoming information, the FOMC will likely begin to moderate the pace of purchases," Mr Bernanke said.

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