China Chokes Credit while EUR plummets

[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”]

Below its 200-day moving average the EUR has breached the floodgates. To what or to where is the million dollar question. The fear that Greece’s budget deficit woes cannot be contained and possibly filter throughout the region has unnerved investors and increased risk aversion actions. The US sub-prime debacle started this way, small, ballooned and morphed within the banking industry. Even the European finance ministers have increased the heat on the Greek government to step up its budget-cutting efforts. With Chinese’s bourses falling for a third consecutive day after news that regulators have told banks to restrict further lending has, by default, increased the demand to own the world’s ‘reserve currency’ the dollar for surety reasons. We are back to buying dollars and wearing diamonds for the time being at least.

The US$ is strong in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in a ‘violent and whippy’ trading range.

Today we have a plethora of data to digest. Yesterday, the NAHB housing market index revealed that homebuilder’s confidence continues to slump (15 vs. 17, m/m). Basically, another drop in home buyers traffic and weaker present sales has pushed this month’s headline print downwards (below a 50 reading is a negative outlook on home sales). Somewhat optimistic was the future expectation, recording a flat reading after last months decline. Digging deeper, prospective buyers traffic fell in all regions, especially out west. Going forward, we can expect shadow inventories to keep new home construction fairly weak, as will resets. Thrown in the Apr. expiration of homebuyer incentives and the immediate future, face value, looks somewhat bleak. The market believe that the housing ‘crisis’ will not prevent the Fed from raising rates. Perhaps the systemic housing issues should be tackled using various targeted measures and not monetary policy.

The USD$ is currently higher against the EUR -0.71%, GBP -0.61%, CHF -0.64% and lower against JPY +0.19%. The commodity currencies are weaker this morning, CAD -0.51% and AUD -1.00%. The BOC remained true to their word and continues 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 said that ‘considerable excess supply remains and inflation will not return to the banks +2% target until the third quarter of next year. Futures traders are pricing in a Sept. hike. He went on to say that ‘the factors shaping the recovery are largely unchanged, referring to policy support, increased confidence, improving financial conditions, global growth, and higher terms of trade’. But the ‘persistent strength of the Canadian dollar continue to act as significant drag’. They anticipate the Canadian economy to grow +2.9% this year (revised down from +3%) and +3.5% next year. Some analysts expect the impact of the statement to be short lived as this morning we get the CPI number and monetary policy tomorrow. Technically, the currency has come too far too fast. There are decent ‘size’ speculators willing to sell the loonie closer to parity.

Despite the Australian consumer confidence jumping the most in six months this January (+5.6%), the AUD fared poorly in the O/N session on concerns that China will maintain its efforts to curb loan growth. This has discouraged demand for higher yielding assets. For a second consecutive day the AUD has come under renewed pressure against the yen. Already this week the PBOC had hiked the one-year bill yield higher for the second time this year and last night they increased banks reserve requirements until the end of the month, damping investor demand for riskier assets. Their objective is to curb record loan growth to prevent bubbles emerging in both the property and equity markets. This evening, China will report a plethora of data including their growth numbers. Recent stronger Australian fundamentals had 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 (0.9130). Currently, there is expected to be strong speculation buying near 0.9100. Will the wall hold?

Crude is lower in the O/N session ($78.27 down -75c). 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. By day’s end the black stuff climbed on the back of positive equity indices down south. 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. Last week was the first losing week since early Dec for the commodity. A bearish weekly EIA report supported by the earlier API findings had legitimate sellers queuing to sell on any rallies. The reports revealed rising US distillate inventories. All week we have voiced that fundamentally, the combined distillate number remains a strong sell indicator. Tomorrow we get the weekly inventories and the market expects another bearish indicator.

The yellow metal remains under pressure as a rally in the greenback has eroded the appeal of the gold as an alternative investment. It is a similar story to last week as the dollar continues to take center stage. However, traders believe there is a strong demand for gold on deeper pull backs with analysts anticipating the greenback again to come under pressure by week’s end ($1,130). Now that the EUR has broken the 200-day moving average sizable retracement by commodities is a possibility.

The Nikkei closed at 10,737 down -27. The DAX index in Europe was at 5,954 down -22; the FTSE (UK) currently is 5,488 down -24. The early call for the open of key US indices is lower. The US 10-year backed up 3bp yesterday (3.70%) and eased 4bp this morning (3.66%). Yesterday, treasuries managed to retreat, the first day in three, as a record jump in the UK (+2.9%, y/y) inflation rate curtailed demand for global FI. Initially, the TIC data report provided support for FI as international demand for long-term US bonds and financial assets rose in Nov. But, with the Dow pushing higher had investors locking in some of their ‘rallied’ profits. The uneasiness of sustainable growth rhetoric from Europe and the PBOC ordering banks to increase their reserve requirements again has risk adverse investors coveting the asst class this morning.

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