The currency blog

….. following China’s decision to increase their required reserve ratio (RRR) for its commercial banks by 0.50%, thus obliging said financial institutions to hold onto more of their deposits as reserves thus in a flash squeezing credit available to the country’s already rampant economy. For China, the threat of inflation is now a reality rather than an assumed likelihood (as presently in other major economies), stemming from the stimulus measures that were introduced over the last year. To this end, China’s move was making good its promise to ensure that inflation wouldn’t get a grip and that the threat of asset bubbles would be dissipated. Moves in the RRR by the People’s Bank of China have always been the favoured method by which the Central Bank has adjusted monetary policy, preferring this to the more popular process in the West of tinkering with interest rates.
Equity markets worldwide took a hit, with global recovery stocks the major punch-bag. The sentiment wasn’t helped by disappointing earnings releases from Alcoa (on Monday) and Chevron, yesterday and markets will wait with trepidation the scheduled US company reports later in the week. Commodity currencies were also on the receiving end with the Aussie and Kiwi Dollars both losing ground versus the US Dollar.

We also got the views of UK MPC member Andrew Sentence who appeared to err on the dovish side although the market in the Far East seemed to take heart from his comments and bought Sterling. The headlines read, ‘Andrew Sentence declares quantitative easing a success’ and ‘interest rates may have to rise to hold back prices’. What was actually said was that even if the Bank of England’s Asset Purchase Programme was not extended further from its current level of £200 billion, that doesn’t mean that the assistance will be, or needs to be, withdrawn. The implication here is that there could be additional stimulus to follow and even if there wasn’t, then rates would still stay at low, low levels for some time to come.

Japan was also interesting. Moody’s warned that the new Finance Minister Kan’s policies look more gloomy for the economy than those of his predecessor, and there are continuing concerns being touted from investors in the country following the continuation of the Japanese Airlines bankruptcy saga. Against this back-drop, it is staggering that individuals in Japan (margin trading Tokyo housewives) are taking up massive positions in total, shorting the US Dollar and going long of Yen. Remember that in November, these investors deemed the Dollar oversold and went long of a net $600 million with the rate rising sharply from 86.40 to 90.50 (in a week) and then on to its recent high of 93.50. This time, individuals have shorted the US Dollar against the Yen by a record high net amount of $1.8 billion. The exchange rate has dropped by over 2 big figures in 2 Tokyo trading sessions and given the recent history of success from the margin traders, we might see the Yen strengthen further towards 88.00 in the short term.

Today we have already seen German GDP for 2009 reported as falling by a record 5% year on year versus a rise of 1.3% in 2008. This number was worse than expected and will temper any near term enthusiasm for buying the Euro. UK industrial output has been released and shows that oil and gas production had outweighed weak factory numbers and produced a rise in November of 0.4% (against expectations of a 0.3% rise). Not surprisingly, Sterling Euro has edged higher and is presently sitting at 1.12, roughly the mid-point of its recent range.

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