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Monday, 13 December 2010 06:15

China Weekly: Lack of Action From PBOC Means, Well…Nothing

Contributed By: DailyFx

 After much pandemonium last week about expected rate hikes from the Chinese central bank the weekend was somewhat anti-climatic. Despite the surge in monthly inflation the central bank did not raise interest rates but rather ordered banks to set aside more cash reserves on Friday. While we were certainly a little surprised by the inaction we find ourselves unperturbed and confident that multiple interest rate hikes are coming, especially after the Chinese economic priority-setting body said that a greater emphasis will be put on price stability next year.

In a statement released in Beijing at the end of the Central Economic Work Conference the leadership put extra stress on the need to “put stabilizing the overall price level in a more prominent position” in the ranking of economic policy priorities, according to a Wall Street Journal report. The report went on to say that the statement came after both Premier Wen Jiabao and President Hu Jintao spoke to the conference and marked a clear change in language from the previous year’s statement. The assertion toward controlling prices can only be understood to mean curtailing the growing inflationary pressures, which official data over the weekend showed hit the highest level in more than two years in November. Deutsche Bank’s China economist Jun Ma said that the statement released represented “the official endorsement for continued tightening of monetary policy, including further hikes and slowdown in credit growth”.

The reluctance to hike rates could indicate some indecision in the PBoC and State Council who may fear aggressive rate hikes on concerns that it will affect the health of banks which could slow growth, something the leadership has no intention of doing. The PBoC may also have adopted something of a wait-and-see approach. We discussed recently the idea among some economists that recent rising inflation is temporary, coupled with the fact that the Chinese trade balance has been narrowing and could continue to do so, PBoC officials may feel that inflation will dampen on its own in 2011 as slower external growth and a stronger yuan lower China’s trade surplus. While the recently released trade data last Friday came in way above market expectations we caution that November trade data is not enough alone to make conclusions on future trends and to suggest that the trade surplus could narrow further in 2011 is a reasonable argument to make.

The reserve ratio requirement (RRR) hike on Friday disappointed many analysts’ expectations, particularly those at HSBC who were a little thrown off by the relative inaction and wrote to clients that the RRR hike fell “short of the increase to benchmark rates that the markets – and we – had been expecting” The RRR hike is really viewed as a half measure since despite multiple hikes of this nature in recent months Chinese banks still managed to lend out vast sums of money. Including the figure for November, Chinese banks have lent 7.45 trillion yuan in the first 11 months of the year, just short of Beijing’s targeted lending figure of 7.5 trillion yuan for the whole year. These half measures are clearly not enough to control prices and the central bank will need to pull out the big guns to see real changes.

When all is said and done, while an argument can be made to defend the PBoC’s lack of action we repeat our opening comments that we firmly believe that rate hikes are coming and will have to be used to tamp down inflationary pressures. We mentioned in our previous piece that we do not believe that inflation in China is a temporary issue and while there is some validity for that argument we do not buy into it and expect the PBoC to act to address this imbalance and restore stability.

Published in Forex News
Monday, 13 December 2010 06:15

Quiet Monday Calendar Has Traders Looking Ahead to Week's Event Risk

Contributed By: DailyFx

 The US Dollar is tracking marginally higher in a relatively quiet start to the week, with market participants seemingly easing in to more of an end of year holiday trading style with every passing day. Rumors of a potential China rate hike over the weekend were not supported, and the only move seen by the government was a lift in the reserve requirement on Friday. This followed a strong round of weekend data out of China, and some much higher than expected inflation readings. While risk appetite should be comforted with the stronger data, it could equally be compromised with the higher inflation readings that continue to suggest that further rate hikes will be needed.

Looking ahead, The FOMC is scheduled for Tuesday and as always, investors will be paying close attention to what the Fed has to say. Any signs of downplaying the need for additional QE, while at the same time sounding more upbeat on the outlook for the economy, will likely open a fresh round of broad based USD buying. Meanwhile, the EU summit meeting is scheduled for December 16-17 and will bring up the possibility of an expansion of the bailout fund. Other important events and releases include US retail sales on Tuesday and the Irish budget vote and Japanese Tankan on Wednesday.

Elsewhere, Australia Treasurer Swan was on the wires over the weekend to introduce a package of new banking measures in an effort to reduce the dominance of the country’s four largest banks that have been uncomfortably raising rates well above the RBA’s level. Meanwhile, German FinMin Shaeuble attempted to lobby on behalf of his currency over the weekend after coming out with some rather strong comments saying that the Euro would not fail and those that bet against it would have no success. On the data front, Sterling has been weighed down a little more than some of the other currencies after Rightmove’s asking prices for homes in England and Wales fell for the second straight month.

The economic calendar for Monday is super light with Swiss producer and import prices (0.1% expected) due at 8:15GMT, followed by the delayed input component of UK producer prices (0.5% expected) at 9:30GMT. Into North America, Canada capacity utilization (75.8% expected) at 13:30GMT is the only scheduled release for that session. US equity futures are trading flat, while commodities are modestly bid.

Published in Forex News

Contributed By: DailyFx

 Markets are not bracing for any surprises when the Federal Reserve makes its next policy decision later today at 19:15GMT. The target benchmark Federal Funds rate is of course, expected to stay between 0.00% and 0.25%. Traders will instead be focused on the accompanying statement, but there too, we may see little change from the last meeting.

Traders will be watching to see, however, if the central bank has any comments on the recent surge in Treasury yields. The interest rate on 10-year U.S. government bonds has surged nearly 80 basis points since the last Fed policy decision on November 3rd, when the central bank unveiled its $600 billion ‘QE2’ program. Explanations for the move have been attributed to a stronger outlook for the U.S. economy, a wider forecast for the budget deficit following a recent tax cut deal struck by the President and Congress, or a combination of the two.

Most likely, the Fed will take a cautious approach, repeating its pledge to provide as much support as it necessary to stimulate the U.S. economy, while maintaining its $600 billion quantitative easing program with the flexibility to adjust purchases based on the evolution of the economic outlook.

Published in Forex News
Monday, 13 December 2010 06:05

UK House Prices Fall 6% over Two Months

Contributed By: DailyFx

UK House Prices fell 3% month-over-month in December according to Rightmove. This was on top of the 3.2% decline in November, making it the largest two month drop since Rightmove records began in 2001. On a year-over-year basis, house prices are now barely positive, up 0.4% from the same time last year. This release had no impact on currency markets as is typically the case.

Published in Forex News

Contributed By: DailyFx


Daily Update: How fast perceptions can change. Only weeks ago market observers were speculating about more easing from the major central banks, with the potential for additional rounds of quantitative easing. But as economic data becomes increasingly constructive, interest rate expectations are actually rising.

A 50 basis point spike in U.S. 10-year Treasury yields over two weeks has begun to put pressure on the front of the curve. In fact, at 30bps, we see one year interest rate expectations from the Federal Reserve at the highest levels in five months. We see similar moves in expectations for the ECB and BOE. Interestingly, at 47bps, markets are expecting more in the way of tightening from the ECB than they are from the Australian central bank.

Published in Forex News

Contributed By: DailyFX

Europe Session Key Developments

* IBEX 35 Surges Over 4 Percent
* 18 of the 18 Western European Benchmark Indexes Close Higher

Investors Optimistic that ECB Will Contain Sovereign Debt
European markets closed higher as investors speculated that the ECB may step up measures to contain the regions sovereign debt crisis. The broad based rally was lead by European bank stocks as Portugal and Ireland led a decline in the cost of insuring against losses on government and corporate bonds in Europe. Contracts in Belgium, Italy, and Spain also fell from previous highs. Many investors feel that the market was due for a bounce after the consistent selloff amid concerns of European debt. The Euro rose against the dollar and the yen on speculation that policy makers will delay their exit from emergency, unconventional, liquidity measures at tomorrow’s meeting of the Governing Council in Frankfurt. Overall, all 18 western European benchmark indexes closed in the green on Wednesday.

FTSE 100 / 5,642.50 / +114.23 / +2.07%
UK stocks advance as Chinese manufacturing expanded for a fourth month, boosting raw material companies. China’s Purchasing Managers’ Index rose to 55.2, the fastest pace in seven months. The results was more than the 54.8 median economist forecast in a Bloomberg News survey. Rio Tinto Group gained 2l.6 percent while Xstrata Plc surged 4.1 percent as metal prices advanced. Sage Group Plc rose 5.4 percent as the software company announced profit that outpaced expectations. Royal Bank of Scotland Group Plc led bank shares higher after three days of losses.

CAC 40 / 3,669.29 / +58.85 / +1.63%
The CAC 40 closed over one and one half percent higher on Wednesday. Carrefour SA slumped 7.8 percent after the world’s second largest retailer cut its 2010 profit forecast and announced it will take charge at its Brazilian unit of 550 million Euros, more than triple its previous estimate. Barlays Plc, Evolution, Deutsche Bank AG and Banco Santander SA were among brokerages that advised investors to pare holdings in the ratiler after the results. Credit Agricole SA surged 3.8 percent after the company announced it is planning changes in senior management.

DAX / 6,866.63 / +178.14 / +2.66%
German stocks rose the most in three months as investors speculated that the debt crisis may force the ECB to expand their arsenal at their meeting tomorrow. Porsche SE advanced 6.2 percent after investors approved a 5 billion-Euro stock sale to reduce the company’s debt before its merger with Volkswagen AG. ThyssenKrupp AG and Salzgitter AG advanced with metal prices. BASF SE rose 3.1 percent, the highest price since 1992. The world’s largest chemical company won European Union approval to acquire food and cosmetics ingredients maker Cognis Holding GmbH after it agreed to sell Cognis’s hydroxyl monomers production business, eliminating antitrust concerns.

IBEX 35 / 9678.40 / +411.20 / +4.44%
The IBEX 35 soared nearly 4.5 percent at the end of the trading session on Wednesday. The index was led higher by the Financials sector, which experienced a 6.56 percent advance. Banco Bilbao Vizcaya Argentaria SA jumped 7.3 percent, leading gains among Spanish banks, after Deutsche Bank AG announced that investors’ mistrust of Spain is unjustified. Banco Santander SA soared 7.2 percent, the largest gain in six months. Faes Farma SA jumped 13 percent, the largest increase in 23 months. The company announced it won approval to sell its allergy treatment in Spain.

S&P/MIB / 20,251.21 / +468.54 / +2.37%
Italian equities surged over 2 percent after posting the largest monthly decline in November since February 09. Banca Monte dei paschi di Sieena SpA rose 3.3 percent. A gauge for European banks ended a three day decline as bond risk fell from record levels. Fiat SpA rose for the first day in four, gaining 4.6 percent ahead of the release of car sales figures in Italy. Fondiaria-Sai advanced over 6 percent as CA Cheuvreux reiterated an “outperform” rating on the stock.

Published in Forex News

Contributed By: DailyFx


The rally in equities on Wednesday has helped to inspire some fresh buying back into risk trades, with the higher yielding commodity bloc currencies standing out as the big winners. The Canadian Dollar is by far the biggest gainer in recent trade with the Loonie finding some relative strength on the back of the news of Russia’s intent to boost Cad reserves over the coming months.

Relative Performance Versus USD Thursday (As of 9:00GMT)

1. KIWI+0.33%
2. AUSSIE +0.15%
3. CAD+0.08%
4. STERLING+0.07%
5. YEN+0.06%
6. EURO-0.01%
7. SWISSIE-0.26%

Price action in the major currencies has been less compelling however, with the Euro in particular still at risk (deeper setbacks seen to test key trend-line support by 1.3250) due to the ongoing debt crisis within the region, while the Pound rallies on resumption of risk buying have also been limited on concerns over UK loan exposure to Ireland. Swissie and Yen price action remains more consolidative than anything else.

On the data front, Japanese trade data came in narrower than expected, while exports data was also subdued. Meanwhile, Australian capital expenditures were much stronger than expected and helped to fuel some additional bids in the antipodean. In European trade, Swiss employment data was improved from the previous print, while UK CBI reported sales had yet to be released at the time of publication. Elsewhere, geopolitical risk remains on the radar, wit North Korea warning that it would launch more attacks on South Korea if provoked.

On the technical side of things, one of the most interesting charts right now is the Aud/Cad daily chart, with the market now confirming a major head & shoulders top following Thursday’s break of neckline support by 0.9900. This should now open a drop back towards a measured move objective by 0.9600 over the coming days. And with the market by cyclical highs on a longer-term basis, we could very well see setbacks extend well beyond the shorter-term 0.9600 objective. Ultimately, only back above the right shoulder by 1.0110 would negate bearish outlook.

We would remind everyone that trade is expected to be much lighter for the remainder of the week given the Thanksgiving day holiday in the US, and as such, the best strategy is most probably to stay on the sidelines. Lighter trade certainly does not mean less volatile trade, and volatility in light trade is not always welcome. More often than not, this type of volatility is characterized by whipsaw moves that make it nearly impossible to trade. The other possibility is that the markets go nowhere which is also not ideal for trading, unless of course you are selling volatility or buying double-no-touch options……….but we digress.


EUR/USD: The latest drop below 1.3445 has confirmed a lower top by 1.3785 and opened a fresh downside extension, with the market accelerating below 1.3335 and the 100-Day SMA by 1.3300 before finally stalling out. Next key support now comes in by major rising trend-line support off of the 2010 lows in the 1.3250 area, and we would look for a test of this level over the coming sessions before considering the possibility of a corrective bounce. Rallies should however be well capped ahead of the 1.3600 figure.

USD/JPY: The market has been in recovery mode over the past several days since confirming a double bottom on the break above neckline resistance at 82.00. However, the risks for additional upside should now be limited to the 100-Day SMA by 84.20, and any rallies into this longer-term SMA should be sold in anticipation of a resumption of the broader underlying downtrend. The focus is still on a retest and break of the record lows by 79.75 from 1995, and only a sustained break back above the 100-Day SMA would negate this outlook.

GBP/USD: Overall, price action has been quite choppy, with the market unwilling to commit in either direction at present. The market has been trending lower since reaching 1.6300 several days back, but at the same time has held above the previous higher low by 1.5650 from October.. As such, the preferred strategy is to remain on the sidelines and look for a sustained break back above 1.6300 or below 1.5650 for clearer directional bias.

USD/CHF: We contend that the market is in the process of carving a material base by 0.9460, and any setbacks should be very well supported in favor of a sustained recovery. A fresh higher low has now been confirmed by 0.9550 following the latest break back above 0.9975, and the market should now accelerate beyond parity towards our next key topside objective at 1.0300 over the coming sessions. Any intraday setbacks are expected to be well supported ahead of 0.9700.


Middle-Eastern demand in Cable with talk of a semi-official name on the offer. Sales in Aud/Usd seen from spec types and real money accounts.

Published in Forex News
Friday, 26 November 2010 03:21

Swiss Franc 9850 is Resistance

Contributed By: DailyFx


After exceeding its 11/1 peak, the USDCHF has completed a monthly reversal (which is significant). The decline from the 2008 high of 12300 consists of 2 equal legs and may be wave B of a multi-year flat. The implications are for a powerful rally over the next several months that ends above 12300. Like the USDJPY, it is possible to count 5 waves up from 9550 so a correction back to 9850 is possible.

Published in Forex News
Friday, 26 November 2010 03:21

New Zealand Dollar Focus on 7400

Contributed By: DailyFx


The NZDUSD has broken to a fresh monthly low and reached t the 100% extension at 7510 (reinforced by 60 day average). Bigger picture, the rally to 7975 may have completed wave B of an expanded flat from the October 2009 high. The next level of interest on the downside is 7400 (former support and resistance), then 7280 (161.8% ext).

Published in Forex News
Friday, 26 November 2010 03:08

Gold Wave 2 Top in Place?

Contributed By: DailyFx


A corrective advance from the low is nearing completion. Expectations are for a top (possible already in place at 1382.90) and reversal. Additional resistance would be 1388 (the 61.8% retracement of the decline from the peak).

Published in Forex News
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