Morning Brief – 20th Party Congress

20th Party Congress

This week, considerable risks will flow into global markets from Asia. The epicentre of these risks will likely come from China as the ruling Communist Party holds its latest conference. China has played its role in global economic and foreign policy events over recent weeks and months. However, it’s role in shaping these conditions has been largely passive. For example, one of the biggest influences in global supply chains has been China’s zero covid policy, something that has been with us for a long time. Another is China’s increasing tolerance towards Russia following the invasion of Ukraine. Both of these features have been known for some time and the role China has played in defining market conditions has been down to the speculation of whether these paradigms may shift, not due to policy change itself.

This passive role for China has the potential to change this week. Over the weekend, the conference of the leading party began. Immediately President Xi Jinping took a defensive and protective line over China’s zero covid policy. One of the key risks as this congress continues and is digested is whether China’s zero covid policy may end anytime soon. Price inflation has been a feature for many western economies for many months with defensive monetary policy actions to halt inflation the key defining features of most recent economic shifts. China is of course a huge player in the global supply chain and therefore you might suppose that China dropping its zero covid policy could expand global supply capacity and potentially pave the way to lower prices. In reality, the excess demand that would also bring to domestic and international markets as a result of China coming back online fully would likely create huge additional price pressures. The fact that zero covid looks like it’s here to stay following comments over the weekend could be welcomed by the world’s central bankers and provide a calming tone to FX markets.

The role of China in international relations has been less passive. China’s threats and the corresponding reactions from the west over challenges to the sovereignty of Taiwan have provided an element of risk to global markets. Escalations in these tensions typically have driven flows demanding USD at the expense of currencies carrying a slightly elevated risk profile of their own. President Xi has already shown that this Congress will have a heavy focus on defence, in particular demonstrating the Party’s commitment to fleshing out its military capabilities, something unlikely to please the hegemonic US but perhaps more so its Dollar. As if the risk towards foreign exchange markets from the 20th Party Congress wasn’t enough, key data releases will also be observed in India, Indonesia, Australia and Japan. Markets will be following these risks and any major upsets could prompt a repricing of wider Asian-FX.

Discussion and Analysis by Charles Porter

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