Why China is blamed for wacky market moves
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The 10-year Treasury 10_YEAR 0.00% yield fell from over 3% at the start of the year to an 11-month low of 2.44% at the end of the May; it more recently traded at 2.60%. The push lower in yields came even amid signs that the U.S. labor market recovery is picking up. All things being equal, yields were primed to rise.
The dollar EURUSD -0.07% has similarly moved at cross-purposes to what’s expected as the economy strengthens and the Federal Reserve starts to tighten monetary policy. The dollar fell 0.2% against the euro in the first quarter, even as declining euro-zone inflation made it more likely that the European Central Bank would have to ease further. The dollar is up 1.5% against the euro this year, a modest bump compared to expectations.
As U.S. Treasury yields have fallen this year, companies and consumers have found it less expensive to borrow money. Simultaneously, the lack of a major dollar rally against the euro means that U.S. exports are more competitive than they were expected to be.
Among the variety of explanations, demand from China continues to grab the attention of traders and strategists. It starts with the depreciation of the Chinese yuan USDCNY +0.19% against the dollar in 2014. Some attributed the move to the government’s desire to shake out speculators betting on a continued rise in the Chinese currency, while others point to the fact that a weaker currency makes Chinese exports more attractive. Whatever the reason, the dollar rose 2.7% against the yuan in the first quarter of 2014, marking the first quarterly gain since the three months ended June 2012, according to FactSet data.
To accomplish that depreciation, China has sold yuan and bought dollars, leaving it with a huge pile of American currency in its reserve. In the first quarter, China’s official data show its foreign-exchange reserves rose by $129 billion to $3.95 trillion, touching an all-time high.
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