US Dollar, Japanese Yen Gain on Risk Aversion as China Hikes Reserve Ratios
Posted 01-26-2010 at 11:38 AM by DailyFX
The US Dollar and Japanese Yen raced higher as Asian shares and US stock index futures tumbled on reports that China’s central bank will require two large banks to raise their reserve ratios by 0.5% effective today in a bid to cool lending growth.
Key Overnight Developments
• US Dollar, Japanese Yen Surge as China Hikes Bank Reserve Ratios
• Bank of Japan Keeps Policy Unchanged, Trims Deflation Forecast
Critical Levels
The Euro sank as much as 0.4% while the British Pound lost 0.2% against the US Dollar as risk aversion intensified in Asian trading, boosting the safety-correlated greenback (see below). We remain short EURUSD at 1.4881.
Asia Session Highlights
The US Dollar and Japanese Yen raced higher as Asian shares and US stock index futures tumbled after Reuters reported that the China’s central bank will require China Citic Bank Corp and the Industrial and Commercial Bank of China to raise their reserve ratios by an additional 0.5% effective today. The move follows a series of recent actions taken by Chinese authorities to rein in lending on fears that the buoyant may overheat, particularly after stronger than expected growth and inflation figures released last week.
The Bank of Japan unanimously decided to keep benchmark interest rates as well as monthly government bond purchases unchanged at 0.10% and 1.8 trillion yen, respectively. Governor Maasaki Shirakawa and company said the economy was “picking up” and trimmed their deflation expectations, saying CPI will fall 0.5% and 0.8% in the 2010 and 2011 fiscal years versus prior forecasts calling for 0.8% and 0.4% declines. However, policymakers cautioned that there is not sufficient momentum for a sustainable recovery and promised to stick with an “extremely accommodative” financial environment, identifying beating deflation as a “critical challenge” for monetary policy.
Euro Session: What to Expect
UK Gross Domestic Product figures are expected to show that the economy expanded 0.4% in the fourth quarter, marking the positive outcome since the three months ending March 2008. However, the markets are likely to be paying far more attention to the components driving growth rather than the headline figure. Indeed, traders’ approach to sizing up the data will probably closely mirror the approach taken with the latest round of earnings reports. In that case, shares of companies that disappointed on revenues saw selling pressure even if headline profits proved in line or even better than expected. While lackluster revenues were easily brushed off last year, they were seen as far more critical now that the end of stimulus measures is on the horizon and the economic recovery must become self-sufficient. This means the British Pound may decline even if the headline GDP growth figure looks encouraging provided government spending rather than private-sector consumption and investment remains the primary driver of expansion.
Germany’s IFO business confidence survey is expected to show that a gauge of companies’ economic expectations held at 99.1 in January, unchanged from the previous month, marking the first time in a year that the metric does not increase. The overall Business Climate indicator that includes companies’ view on both current and future economic conditions is set to rise to 95.1 in January from 94.7 in the previous period, the smallest gain since March 2009. The apparent leveling off in sentiment comes two weeks after year-end GDP figures suggested that the economy shrank in the fourth quarter after expanding in the six months through September. Growth may remain sluggish into 2010 as some of the programs in the government’s 85 billion euro stimulus package begin to expire while unemployment pushes higher to top 9% by the second quarter, hinting private demand will be too weak to maintain momentum behind the recovery. Political uncertainty may add further downward pressure to the confidence gauge amid rising tension between Chancellor Angela Merkel, her ruling coalition partners, and even some notable members of her own party.
Key Overnight Developments
• US Dollar, Japanese Yen Surge as China Hikes Bank Reserve Ratios
• Bank of Japan Keeps Policy Unchanged, Trims Deflation Forecast
Critical Levels
The Euro sank as much as 0.4% while the British Pound lost 0.2% against the US Dollar as risk aversion intensified in Asian trading, boosting the safety-correlated greenback (see below). We remain short EURUSD at 1.4881.
Asia Session Highlights
The US Dollar and Japanese Yen raced higher as Asian shares and US stock index futures tumbled after Reuters reported that the China’s central bank will require China Citic Bank Corp and the Industrial and Commercial Bank of China to raise their reserve ratios by an additional 0.5% effective today. The move follows a series of recent actions taken by Chinese authorities to rein in lending on fears that the buoyant may overheat, particularly after stronger than expected growth and inflation figures released last week.
The Bank of Japan unanimously decided to keep benchmark interest rates as well as monthly government bond purchases unchanged at 0.10% and 1.8 trillion yen, respectively. Governor Maasaki Shirakawa and company said the economy was “picking up” and trimmed their deflation expectations, saying CPI will fall 0.5% and 0.8% in the 2010 and 2011 fiscal years versus prior forecasts calling for 0.8% and 0.4% declines. However, policymakers cautioned that there is not sufficient momentum for a sustainable recovery and promised to stick with an “extremely accommodative” financial environment, identifying beating deflation as a “critical challenge” for monetary policy.
Euro Session: What to Expect
UK Gross Domestic Product figures are expected to show that the economy expanded 0.4% in the fourth quarter, marking the positive outcome since the three months ending March 2008. However, the markets are likely to be paying far more attention to the components driving growth rather than the headline figure. Indeed, traders’ approach to sizing up the data will probably closely mirror the approach taken with the latest round of earnings reports. In that case, shares of companies that disappointed on revenues saw selling pressure even if headline profits proved in line or even better than expected. While lackluster revenues were easily brushed off last year, they were seen as far more critical now that the end of stimulus measures is on the horizon and the economic recovery must become self-sufficient. This means the British Pound may decline even if the headline GDP growth figure looks encouraging provided government spending rather than private-sector consumption and investment remains the primary driver of expansion.
Germany’s IFO business confidence survey is expected to show that a gauge of companies’ economic expectations held at 99.1 in January, unchanged from the previous month, marking the first time in a year that the metric does not increase. The overall Business Climate indicator that includes companies’ view on both current and future economic conditions is set to rise to 95.1 in January from 94.7 in the previous period, the smallest gain since March 2009. The apparent leveling off in sentiment comes two weeks after year-end GDP figures suggested that the economy shrank in the fourth quarter after expanding in the six months through September. Growth may remain sluggish into 2010 as some of the programs in the government’s 85 billion euro stimulus package begin to expire while unemployment pushes higher to top 9% by the second quarter, hinting private demand will be too weak to maintain momentum behind the recovery. Political uncertainty may add further downward pressure to the confidence gauge amid rising tension between Chancellor Angela Merkel, her ruling coalition partners, and even some notable members of her own party.
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