RISK OFF THE TABLE AFTER CHINA’S BANK LENDING WARNING

This morning’s FX View from IB:

The magnitude of the concerns surrounding the fiscal state of Greek financial affairs has today ripped deeper into the health of the euro. The problem is reminiscent of the wealthy tourist struggling with the hustle and bustle of a busy town center, only to be constantly hounded by a young beggar. No matter how the tourist tries to ignore the demands of the young urchin, he simply won’t go away. And although time is a great healer, the market appears to have grown suspicious that the solution from the government of Greece is nothing more than a string of poor and unworkable assumptions. The fear of onlookers from outside the Eurozone is that if Greece can do this, then others might also resort to bad assumptions to solve its nation’s books on paper and further weaken the credibility of a euro that has found itself languishing after the official submission of the Greek government.

U.S. dollar – The dollar is following through on Tuesday’s gains in trading more reminiscent of risk aversion than would seem appropriate given the escalation of the rally in equity markets. Bond prices rose in line with equity indices yesterday afternoon, an unusual movement as lower yields accompanied higher equities. In overnight trading two factors are helping boost the value of the dollar. Tame inflation data in New Zealand helped erode appetite for risk trades (see Aussie dollar for more details). According to official government sources, several major Chinese banks were told to curb their lending for the remainder of the month. It appears that the tightening of monetary policy continues to gain traction and scope. As might be expected, stocks trading in Shanghai reacted negatively sending the index down by 2.5%.

Aussie dollar – Spare a thought for the Aussie dollar, which slumped overnight courtesy of two pieces of external data. First, it reacted to the fallout from the restrictive Chinese lending news. Then it fell over a price report from its neighbor. Consumer prices released in New Zealand were unusually tame, and given the relatively close relationship between its economy and that of Australia, investors were sharp to reflect a low number for the commensurate Australian reading next week. That would be a key report in the week ahead of the central bank’s February 2 meeting. And while they might look right through any report showing low inflation and look directly at robust retail sales, investors jumped headlong from the windows earlier taking the Aussie unit down by over one cent to 91.32 U.S. cents.

Euro – A visit to beneath the 200-day moving average for the €/$ pair isn’t helping to conjure up support for the single European currency. Despite a rush of blood to the head last week when the government of Greece filed its fiscal intentions with the European Commission, the euro is now facing a second and what seems to be a far more powerful wave of selling. Even before today, the British pound was trading at a four-month high against the euro. This morning the euro is at $1.4142 and is at its weakest point to the dollar since August.

Japanese yen – Risk aversion and the draining of liquidity from Shanghai has helped send the yen firmer to the dollar today at ¥90.92.

Canadian dollar – The Canadian unit has slumped hugely against the dollar after a smaller than expected dose of consumer price index for December. The CPI at 1.3% fell short of the 1.5% prediction and presents the Bank of Canada with plenty of time to consider changing rates. It left interest rates steady at yesterday’s monthly meeting. The dramatic fallout today has seen the buying power slip from 97.00 U.S. cents to 95.84 cents this morning.

British pound – There was plenty for sterling traders to digest overnight after Bank of England governor Mervyn King delivered his first major speech of the year. He referred to the factors that conspired to create a spike in the December inflation reading as temporary and said that they wouldn’t change the Bank’s forecast. Minutes from the last MPC meeting revealed all nine committee members were on the same page in voting for unchanged rates and a continuation of the plans to purchase £200 billion in assets. They noted that change was not needed ahead of February’s Bank report, which might paint a clearer picture of the economy.

British unemployment fell sharply during December according to data released this morning. Some 15,200 jobs were added in the month compared to forecasts for a 2,500 drop. Still, the data also revealed a rise in the number of people in the economy neither working nor seeking employment. The pound declined against a furiously surging U.S. dollar and stands at $1.6255, while it breached 87 cents per euro for the first time since late August.

Source: IB