Jim Sinclair’s Commentary
Operation Twist will not have any significant impact on unemployment and the present softening economy. It will set up a situation for which only QE has application. It is that fact that support gold’s bullish trend.
Will Chinese Twist Fight the Fed?
By TOM ORLIK
SEPTEMBER 23, 2011
China doesn’t have much to fear from the latest twist in U.S. monetary policy. But the U.S. might have something to fear from China’s response.
China probably won’t face a new wave of destabilizing hot money into its financial system. "Operation Twist" doesn’t involve printing more money, but only a shift in $400 billion of the Federal Reserve’s holdings of U.S. Treasury’s from the short to the long end of the curve.
Even if there is more cash seeking higher returns, expectations of yuan appreciation—a major reason to bring hot money into China—have collapsed. Forward markets are pricing in a slight depreciation of the yuan against the dollar in the year ahead. China’s equity markets and property sector, the most likely destinations for hot-money inflows, are also in the doldrums.
That doesn’t mean the move will leave China unaffected. With $1.17 trillion in U.S. Treasurys in July and tens of billions more to invest every month, the Fed’s latest move confronts China with the unappealing prospect that returns on its foreign-exchange reserves, already low, will fall still further.
But Beijing has options. As the Fed moves its portfolio to the long end of the curve, pushing down long-term interest rates, the relative appeal of short-term debt is increased. China might be tempted to do a "reverse twist" and move to the short end—muting the impact of the Fed’s twist.
