FOPLADE- Anláisis Financiero

CHINA’S RESERVE RATIO INCREASE DEFLATES MARKETS China increases reserve requirements; creating a temporary move to risk aversion.
-US retail sales (postponed from Thursday) will be released today.
-EUR breaks links to broader market and continues to sink. Next support is at 1.3500.
-Weaker than expected Eurozone GDP and IP puts additional pressure on EUR.

FX Market Update

The FX market is seeing some very prominent selling of risk today, though for once it isn’t wholly due to developments in Europe. China announced that the reserve ratio of its banks will increase by 50 basis points, with the change becoming effective on the 25th of the month. SEK, NOK and AUD have borne the brunt of the selling, not surprising as these currencies have been three of the four best performing majors over the past five trading sessions. CAD, the other top performing currency over that same time period, continues to do well on the crosses during periods of strong USD buying (the greenback is gaining against all majors today), and is lagging only the USD and JPY. Commodities are also down sharply with copper leading the charge, while crude is down well over a percentage point along with gold.
• This is a logical, if not knee jerk reaction from the market as the global leader in growth continues to move its monetary policy in a tightening direction. However, too negative a reaction on the reserve ratio requirement increase alone probably suggests buying opportunities once the dust settles. The responsible way to ensure that growth is maintained at a reasonably high level for an extended period of time is to make sure such growth doesn’t push too far away from the sustainable trend, thus restraining incipient asset price bubbles. What is ultimately good for global growth, and thus risk assets, is that China continues to sustainably consume raw, intermediate and finished goods at elevated levels, rather than overconsumption followed by a crash in consumption. Commodity currencies should be weaker today on the China news, though global growth will be shown to have rebounded when the 2010 numbers are all accounted for, suggesting that short term liquidation of cyclical currencies creates buying opportunities after all has quieted down. One final note on China, while M2 money growth in the country has begun to sharply decline, the current estimate (January) suggests that this monetary aggregate is still over 25% higher than one year ago. The rate of increase in 2009 was staggering (see top graphic), and we shouldn’t be surprised that much more monetary tightening is in the pipeline from China.
• Yesterday’s $16bn auction of US 30-year bonds was rather disappointing and sent yields on the long bond to near one-month highs, though today’s environment has helped US yields tick down somewhat. Most relevant for the USD, indirect bidders (which includes central banks) bought only 28.5% of the offering, far lower than the 40.7% average of the past 10 auctions. However, there is little USD impact to be had as other factors are keeping the USD well bid; the dollar index has hit a new 7 month high. Next week’s TIC data release will be particularly interesting as it corresponds to December, the month in which the current USD rally began. We’ve seen a recent improvement in TIC data, and another large inflow into so called long-term assets will provide a sentiment boost to the USD. S.T.

Americas

USDCAD (1.0530) • Despite the fact that USDCAD is up 0.3%, CAD continues to outperform on the crosses as the USD gains across the board. The propensity of CAD to hold its value much better than most other majors during periods of risk aversion suggests that CAD may be viewed as holding less short-term potential versus other high beta currencies on a reversal of the USD’s fortunes. Still, broad based USD selling would be bearish for USDCAD and leave the pair back on its trajectory towards parity. We’d look to downtrend resistance off of the Tuesday North American session’s high near 1.0758 to hold the topside currently sitting just above 1.06. Canadian Motor vehicle sales for December will be released today. S.T.
Europe
EURUSD (1.3550) • EUR has dropped 1.1% since yesterday’s North American close. China’s reserve ratio increase accelerated the downward move that was already in place on the back of weaker than expected GDP and industrial production. Q4 GDP was expected to climb 0.3%, but instead only managed to increase 0.1%; while industrial production dropped 1.7% m/m. Accordingly, the recovery continues to be fragile and uneven and currency traders can find little reason to be long EUR. After yesterday’s brief announcement from the EU that confirmed that the “Euro area member states will take determined and coordinated action, if needed, to safeguard financial stability in the euro area”, CDS levels and bond yields came in. The rest of the market was already well into risk taking mode, with equities, commodities and non-USD and non-EUR currencies appreciating. However, the EUR was unable to rally, highlighting that traders remain unwilling to go long EUR - see middle chart on page 1. The good news from yesterday’s market moves is that it hints that developments in the EU are no longer driving risk aversion across markets and that traders are instead playing them out against the EUR specifically. The currency has now broken through the psychologically important 1.3600, the next level to watch for is 1.3500 followed by 1.3483, the 61.8% retracement of the February to December 2009 rally - see bottom chart on page 1. Pivots today suggest that buying pressure will emerge at 1.3458 and selling at 1.3727 - see table. C.S.
GBPUSD (1.5610) • Sterling is lower today, but still trading within Tuesday’s 1.5562 to 1.5748 range. The chart is bearish, with the 100 day moving average of 1.6229 now trading below the 200-day 1.6263; however for now the psychologically important 1.5500 is holding well. There were no economic releases today, but the market is expecting CPI to rise to 3.5% y/y on headline and 3.3% y/y on core next week. Even though the BoE has reiterated that it is anticipating inflation to rise above its 3.0% limit before falling back, any upside inflation surprise will cause a stir in markets. C.S.

Asia / Oceania

USDJPY (90.10) • USDJPY continues to hover on either side of 90.00 and its 100-day moving average of 90.13. Consumer confidence rose to 39.4. C.S AUDUSD (0.8800) • The commodity currencies are all losing ground against the USD on the back of tighter policy in China. AUD has yet to break out of yesterday’s range (0.8750 to 0.8921). C.S.
USDCNY (6.8333) • On the eve of the week long Lunar New Year holiday (which will decrease Asian flows next week), the PBoC has raised the reserve requirements on the deposit taking institutions by 50bpts. This is the second increase in the last month and provides further evidence that China is making small attempts to tighten policy in an attempt to reign in asset prices and avoid a bubble. The market has taken this negatively, however we would argue that in the medium term tighter policy in China will allow for a more sustainable recovery. • Over the last three sessions the yuan has depreciated 0.11% against the USD. The significant change is widely expected to have been caused by the buying of USD leading into the New Year celebrations; however at a time when there is ongoing international pressure for China to allow some appreciation of the yuan it seems at odds with where the managed currency should be moving. C.S.

Commodities

Oil (73.58) • Oil has fallen from yesterday’s close on the back of how tighter policy in China will impact global growth going forward. Accordingly, oil failed to break above its 100-day moving average of 75.81 and is now trading between there and its 200-day (71.21) again. The rolling 45-day correlation between CAD and oil remains high at 0.82. • Due to the snow in the northeastern US, oil inventories (usually released on Wednesday) will be released today at 11am EST. The market is expecting a 1,600k build in oil inventories and a drop of -1,550k in distillates. C.S.
CRB (269.70) • Like oil, the CRB index has climbed off its lows, but continues to trade between its 100 and 200-day moving average (273.33 and 262.33, respectively). Yesterday’s above expected release from Rio Tinto is favourable for commodity markets. The CEO, Tom Albanese, said that “in those businesses that are supporting the Chinese market, we’ve never seen stronger demand”. C.S.

Suggested Reading

When Deficits Become Dangerous, Michael Boskin, WSJ (February 12, 2010) Europe Vows to Save Greece, C. Forelle, M. Walker & A. Galloni, WSJ (February 12, 2010) China’s Surprise Monetary Tightening Shatters Calm, J. Chisholm, FT (February 12, 2010) New Dangers for the World Economy, The Economist (February 11, 2010) Not so Risk Free - Which Countries Have the Biggest Problems?, The Economist (February 11, 2010) Five Threats to the Common Currency, Stefan Schultz, Spiegel (February 12, 2010) Our Monthly FX Strategy Call is now available, please dial in at your convenience.
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