Three things to watch this week: Fed, RBA and yuan

China and its currency are in focus this week. Photo: Jerome Favre Janet Yellen, chair of the U.S. Federal Reserve, smiles during an Economic Club of Washington discussion in Washington, D.C., U.S., on Wednesday, Dec. 2, 2015. Yellen said she’s confident in the outlook for economic growth and warned that waiting too long to end the era of near-zero interest rates could force the central bank to tighten too quickly, which would risk disrupting financial markets and the six-year expansion. Photographer: Andrew Harrer/Bloomberg *** Local Caption *** Janet Yellen Photo: Andrew Harrer

The US Federal Reserve’s widely expected interest rate rise will dominate global market sentiment this week, but there are a few things going on domestically and in China, Australia’s biggest trading partner, that could also steer investor mood.  US Federal Reserve

Janet Yellen, chair of the US Federal Reserve Photo: Andrew Harrer, Bloomberg

The long-awaited first US interest rate increase in almost a decade is by far the biggest potential market-mover this week.

Expect more drama both in the lead-up and after the Federal Reserve announces its much-telegraphed decision.

The first increase, of 25 basis points, in itself isn’t enough to unsettle markets too much; most Fed-watchers and investors will be scrutinising the accompanying statement for an idea of how quickly the US central bank will push rates towards 1 per cent.

Some repositioning and flight from risk late last week upset high-yield bond markets, and emerging markets and commodity exporters remain vulnerable. ASX to fall” src=”http://老站出售smh老域名出售备案老域名/content/dam/images/g/k/5/i/r/w/image.imgtype.articleLeadwide.620×349.png/1447289487993.png” title=”” width=”100%” />

Photo: Bloomberg

Last week is best forgotten if you’re an equity investor in Australia, and this week threatens to open in equally inauspicious fashion. Futures pricing suggests a 1.45 per cent slump at the opening of the S&P/ASX 200 on Monday, to below 5000 at the bell for the first time in nearly a month.

Weighty resource stocks have been dragged down by ever-sinking commodity prices, and there’s no sign of respite here, particularly as the US prepares to lift interest rates.

Banks, too, have been under pressure as the Reserve Bank of Australia moves towards a more neutral policy stance. The minutes of the RBA’s last policy meeting, to be published on Tuesday, are expected to confirm the central bank’s faith in Australia’s great economic transition.

This, added to a cooling housing market, could continue to weigh on lenders, three of which – ANZ, NAB and Westpac – go ex-dividend this week.  Yuan and China

Photo: Jerome Favre

The strength of China’s economy is important to Australia, and so is the value of its currency. A weaker currency means more expensive commodity imports, particularly as these are priced in US dollars.

China’s renminbi is pegged to the greenback, but has been allowed to depreciate a little more this year to help with the country’s ability to compete as an exporter.

Now, it appears, the People’s Bank of China is shifting its management of the yuan to tracking a currency basket rather than the dollar.

The objective, according to Capital Economics, is to keep the yuan’s value broadly stable rather than be compelled to have it follow the dollar higher, as it has over the past couple of years.

In any case, most expect the US Fed’s tightening cycle, due to start this week, to ultimately push the Chinese currency down by between 6 per cent and 10 per cent next year, which will put additional pressure on commodity prices. Keep an eye out for any further news on the yuan this week.

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