China’s polite question for the Fed – Westpac

Sean Callow, Research Analyst at Westpac, suggests that China’s backdrop has added spice to the annual US-China strategic and economic dialogue (SED) meetings in Beijing on 6-7 June.

Key Quotes

“A remarkable (even surreal) Bloomberg article cited Chinese sources claiming that at the SED, the Chinese government would be seeking information on whether the Fed will raise rates in June or July, with China’s preference for July, presumably to allow more time to prepare for the likely rise in USD and thus potential surge in capital outfl ow from China.

It is hard to take seriously such an outlandish story, but we can at least take away one plausible implication - China is worried about the Fed’s next rate hike being delivered soon. If nothing else, it seems China will be making clear to the US that it expects Fed tightening to have a significant impact on Asian markets. It is further food for thought for the FOMC which has already publicly admitted that it will weigh up the UK EU vote the week after the June 14-15 FOMC meeting.

Westpac’s forecast of a Sep rate hike would provide investors more time to prepare but still deliver a substantial boost to the US dollar, including against the Aussie, which we see at 0.70 in Q4.”