China mops up excess liquidity

[mserve id=”Central_Bank_PBOC.jpeg” align=”left” width=”250″ caption=”People’s Bank of China ” alt=”Peoples Bank of China PBOC Central” title=”People’s Bank of China”]

Currently it’s a get out of Dodge mentality. But is this the correct move? Are markets focusing on China or Greece’s budget deficit woes potentially spreading throughout the region? Could Greece be asked to leave the EU if they do not get a grip of their finances? Regarding China, the measures conducted to date are all about ‘mopping up excess liquidity, restraining some excesses and reducing credit risks’. In reality, they are prudent actions being taken that will provide ‘big positives for sustainable growth’. The reason why all of a sudden it’s an issue is because Chinese banks appear to be front-loading lending with new loans in the first few weeks of Jan. These are hardly action conducted by a Cbank overly worried about an asset bubble just yet.

The US$ is stronger in the O/N trading session. Currently it is higher against 15 of the 16 most actively traded currencies in another ‘whippy’ trading range.

Forex heatmap

Yesterday’s US data managed to report a few surprises. Dec.’s PPI was very much ‘within the range’ of consensus. The overall index was a tad higher than the expected print at +0.2% vs. +0.1%, m/m, with the increase coming from the food component which did not carry over to the CPI. Analysts expect the increase could be attributed to the weather and that the market should expect a ‘reversal of fortune’ in the Jan. print. Apart from food prices and health care services, there were few surprises in the major sub-categories in the report. Core-PPI was unchanged (flat), which was in line with market expectations. However, in other data, US housing starts revealed a few surprises. The -4% decline in Dec.’s new starts was more than the market expected (+0.560k vs. +0.580k). However, combining it with an offsetting upward revision to the previous month it was not so bad. More importantly, the level of building permits was much stronger than expected advancing +11% (+0.650k vs. +0.590k). Analysts will tell you that permit levels are always a more important indicator than starts. Over time they are more stable and are a better marker for defining ‘the trend’. For example, the Dec. ‘starts’, the depressed print is attributed to weather related issues. One report does not make a trend, but the markets should take solace in that +11% uptick.

The USD$ is currently higher against the EUR -0.17%, GBP -0.63%, CHF -0.22% and JPY -0.22%. The commodity currencies are mixed this morning, CAD -0.22% and AUD +0.26%. The loonies’ actions were not immune to the dollars strength yesterday. It fell the most in three months on the back of weaker oil prices and a CPI report showing that prices last month rose less than forecasted (-0.3% vs. +0.4%). This has cemented the BOC rhetoric that they will not be raising rates before the end of the second quarter. Even the Russian central bank’s deputy chairman Alexei Ulyukayev announcing that they are buying CAD and Canadian securities did not provide support for the currency. Some analysts believe that the amount of the Russian reserves that will flow into the loonie will be quite small. Other data not helping the currency yesterday was Canadian Manufacturing factory sales advancing less than expected in Nov. (+0.1% vs. +2.1%). Earlier this week the BOC remained true to their word and continued to provide the needed transparency that capital market demand. They kept their O/N lending rate on hold at +0.25% and pledged to leave it unchanged through the end of the second quarter. Again they were vocal about the loonies’ strength and how weaker US demand could slow the economic recovery. Governor Carney must be happy with this week’s currency movement. For now any rally by the loonie will be seen as a good selling opportunity.

Because of its strong links, commodity wise, with China, it is not surprising to see the AUD advanced after a Chinese government report showed that their fourth-quarter growth rose at the fastest pace since 2007 (+10.7% vs. +10.5%). Stronger Chinese data last night has somewhat dampened concerns of a slowdown in the region, at least for now. Even the PBOC hiking Bill yields again has not had a strong negative effect on the currency. Their objective is to curb record loan growth to prevent bubbles emerging in both the property and equity markets. Recent stronger Australian fundamentals have traders increasing their bets that the RBA will keep raising interest rates. They next meet at the beginning of Feb. With the Australian economy well into a recovery phase, there is added pressure on Governor Stevens to increase the O/N borrowing cost to 4% for a fourth straight meeting (0.9089). However, commodities continue to trade under pressure and the AUD will be dragged with it.

Crude is lower in the O/N session ($77.64down -10c). Yesterday, crude managed to touch its lowest level this year as the market anticipates that global supply remains sufficient and the strong ‘buck’ would discourage investors using the commodity as a hedging conduit. At one point the commodity dropped -2.6% as the dollar climbed against the EUR after China took steps to curb lending and as Greece’s bonds tumbled. The IEA have added support to the sufficient supply theory by stating earlier this week that OPEC will not need to increase production again this year. Analysts continue to voice their concerns that the ‘increasing demand in China and emerging markets will not be strong enough to offset declines in the other countries’. Demand destruction is healthy and should provide added pressure to oil prices. The danger is that OPEC could over-produce and add to the glut of available inventories. This morning we get the weekly inventory reports and the market anticipates another build of stocks which will add support for the ‘bears’.

Ouch, the yellow metal fell just under 3% yesterday, the most in a month, as a rally in the greenback has eroded the appeal of the gold as an alternative investment or a safe heaven. It is a similar story to last week as the dollar continues to take center stage with the index climbing another 1.2%. To date, the commodity has been top heavy with ‘one direction lemming buying’ after last years 24% rally. Any liquidation with momentum has nervous investors seeking an early exit. With the EUR remaining vulnerable and the dollar the ‘go-to’ currency expect to see selling on upticks for the time being ($1,105)

The Nikkei closed at 10,868 up +130. The DAX index in Europe was at 5,864 up +14; the FTSE (UK) currently is 5,431 up +11. The early call for the open of key US indices is lower. The US 10-year note eased 4bp yesterday (3.66%) and are little changed in the O/N session. Risk aversion and supply has pushed yields lower. The possibility that Obama health-care plan will be blocked after loosing the Massachusetts Senate seat may reduce the government’s debt requirements. Plummeting global equities fuelled by China ‘choking credit’ has concerned investors seeking some sort of surety. The uneasiness of sustainable growth rhetoric from Europe and Greece’s budget deficit problems continues to find buyers on pull backs.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell