FX Daily Planet: New York Open

FX Daily Planet: New York Open

Click here for the full Note and disclosures.

View for the day

A post-Greece lull in the markets proved unexpectedly shortlived, as the PBOC dropped an unexpected announcement of its second 50bp hike in reserve requirements. That China has tightened again is not a surprise but the timing was – we had expected a move after the New year holiday. The news caught the market on the hop and reversed the tentative move back into risk that had been underway since benign China CPI earlier in the week had appeared to reduce the risk of near-term policy action. Equities have given back their earlier gains and both AUD and NZD sharply dropped on the news - now 1.0% lower on the day vs USD, the main beneficiary along with JPY.

Going forward, our China economists expect China’s policy normalization to include two more RRR hikes of 50bp and three 27bp hikes in the benchmark policy rate with first hike in early 2Q. Meanwhile, it is important to understand that the monetary authorities’ main policy intention this year is to smooth credit creation, not to curb overall credit conditions and real economic activity. Thus, we expect the Chinese economy to continue growing solidly this year, with 2010 real GDP growth forecast at 10.0%.That said, given the recently experienced overreaction in the market, China’s tightening is likely weigh on the risk market at least for a short while.

While overshadowed by China’s surprise hike, Eurozone data (Q4 GDP and industrial production) was unexpectedly weak (see below), which reinforces the market’s growing dislike of EUR in the wake of the political indecision towards. Note JPM has cut its 2010 GDP forecast from 2.4% to 2.2%. The next focus for EUR is the Ecofin meeting and the Greek Government's announcement about the details of its fiscal stability program on Feb 16th. Finance ministers have a lot of work to do to regain the credibility which this week’s political indecision has lost.

In the US session, on top of the scheduled U.Michigan consumer confidence, we also receive Jan retail sales and business inventories that were postponed from yesterday due to bad weather. We are more bearish than the market on both retail sales and consumer sentiment, expecting the former to be flat and the latter to have deteriorated slightly. With the market once again running scared of Chinese tightening, any disappointment on the US growth side would further curb the appetite to get back into risk trades.

Overnight news

CNY: PBoC announced to raise RRR by 50bp unexpectedly, effective Feb 25th.

EUR: Euro zone Q4 GDP 0.1% vs 0.3% consensus. Dec IP -1.7% m/m vs +0.1% consensus. JPM revises 2010 GDP forecast from 2.4% to 2.2%.
EUR: ECB board member Stark said current efforts of the Greek government to consolidate the country’s budget are an “absolute minimum,”, also saying any help from the IMF would“not be appropriate,” adding a European-Union bond wouldn’t solve structural problems of countries such as Greece.

EUR: ECB Nowotny said that Europe does not want Greece’s problems to have a negative effect on the broader region, therefore it makes sense to contain the risks and avoid a spillover.

SEK: Riksbank deputy governor Svensson - “Instruments other than interest rates are likely to be much more effective in avoiding excessive credit growth and asset-price booms, and should thus be used as a first best alternative.”
NZD: Dec. retail sales was much weaker than expected at 0.0% m/m (cons. +0.6%).
JPY: MoF’s weekly portfolio flow data showed that foreign investor turned net buyer of Japanese stocks last week. Meanwhile, net foreign stock purchase by Japanese investor increased to ¥202bln from ¥126bln last week.
JPY: Jan. consumer sentiment improved to 39.4 from 37.9 in Dec.
JPY: Japanese Banking Minister Shizuka Kamei said that Japan Post could buy more US Treasuries as one way to reduce its current heavy focus on domestic government debt.
USD: Fed data showed that Federal Reserve’s balance sheet expanded in the latest week.

Today’s watchlist (all times GMT; +11hrs for Sydney, +9hrs for Tokyo, -5hrs for New York)

EUR: Germany 4Q GDP prelim. (%q/q, sa) @7:00 (JPM: 0.0, Cons: 0.2); ECB Nowotny speaks @8:00; Euro Area 4Q GDP (%q/q, sa) @10:00 (JPM: 0.3, Cons: 0.3); Euro Area Dec IP (%m/m, sa) @10:00 (JPM: -1.0, Cons: 01)
USD : Jan retail sales (%m/m, sa) @13:30 (JPM: 0.0, Cons: 0.3); Jan retail sales less autos (%m/m, sa) @13:30 (JPM: 0.5, Cons: 0.5); Feb U.Michigan consumer conf. prelim (index) @14:55 (JPM:74.0, Cons:75.0); Dec business inventories (%m/m, sa) @15:00 (JPM: 0.0, Cons: 0.2)

Overnight price action

FX: USD, JPY buoyed by China’s unexpected RRR hike at the cost of high yielders (AUD -1.0%, NZD -0.9%, CAD -0.5%).
FX vol: FX vols remained motly unchanged across the G-10 pairs.
Commodities: oil down -1.6%, gold down -1.2%.
Bonds: European bond market remained relatively quiet with Bunds 10yr yield down 3bp while Greece 10yr yield up 2bp.
Equities: Equities market trading flat to negative on PBoC announcement.

Technical View for the day

The handling of the Greek issue is definitely not what markets were looking for in terms of re-establishing confidence in the EUR what conclusively caused a bit of a headache in form of a stronger sell-off. This feeds into the general perception that the EUR is caught in a broader down-swing towards the 1.31 handle in EUR/USD which would only change once major barriers at 1.3852 and at 1.3965 would be taken out. As Cable refused to join the selling stampede EUR/GBP entered a real nose-dive but would need to break below key-support at 0.8658/13 to confirm a sustained decline towards the last bottom at 0.8400 and a potential extension into Fib.-support at 0.8250. With the EUR under tremendous pressure across board and in particular against commodity currencies we are now approaching key-supports like in EUR/CAD at 1.4285/48 from where we could at least get to see a temporary EUR bounce whereas the big picture is ultimately pointing even lower

Research from the region you may have missed

China: PBoC raises RRR by 50bp; steady monetary normalization on track
https://mm.jpmorgan.com/servlet/PubServlet?skey=R1BTLTM3NDI3NS0w&Name=GPS-374275-0.html

Euro area GDP soft in fourth quarter; some downward revisions looking forward
https://mm.jpmorgan.com/stp/t/c.do?i=B89FD-4D6&u=a_p*d_374267.html*h_-1ovub67

ENDS

© Scoop Media