Australian, New Zealand Dollars Drop as China Ponders Year Ahead

Talking Points:

• Euro corrects upward after lagging in the FOMC aftermath
• Aussie, NZ Dollars fall as China bigwigs ponder 2017 policy
• US Dollar may pull back as markets rethink Fed policy bets

The Euro outperformed in overnight trade, correcting broadly higher having fared the worst among the majors amid Fed-inspired volatility. The Yen remained under pressure after hitting a 10-month low yesterday as Japan’s benchmark Nikkei 225 stock index moved higher, sapping demand for the anti-risk currency.

The Australian and New Zealand Dollars fell as markets looked toward the conclusion of the China’s Central Economic Work Conference. The annual gathering of leading government officials meant to plot the course of economic policy in the coming year began on Wednesday and is due to wrap up today.

The world’s second-largest economy mounted a spirited recovery in 2016. A private-sector estimate of manufacturing- and service-sector activity growth points to a rebound from the prior year’s slump and puts the current pace of expansion at the fastest in at least three years.

Concerns have emerged after the US presidential election however as fiery rhetoric from the incoming administration threatens to scrap free trade agreements and raise steep tariff barriers, with China a go-to villain in the narrative. Not surprisingly, markets are keen to hear Beijing bigwigs sound off on the matter.

Besides each other, China is Australia and New Zealand’s largest export market. A protectionist turn in US policy that hurts the East Asian giant would probably echo along the supply chain and sour the two countries’ growth outlook, beckoning further easing. Not surprisingly, their currencies are uneasy.

China-related worries aside, a quiet data docket in the final hours of the trading week may leave room for rethink of post-FOMC developments. The past year clearly taught markets that Fed forecasts are not a guarantee. Furthermore, much of the outlook hinges on the still highly uncertain US fiscal policy path.

If markets begin to entertain such thoughts in the wake of breakneck volatility that pushed many benchmark assets to notable extremes and put the US Dollar at a 14-year high, a round of profit-taking is likely. That may cap the greenback and offer a lifeline to some of its battered counterparts, at least in the near term.

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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