http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/us_open/2010/12/27/Currency_Markets_a_Lackluster_Performance_Despite_Chinas_Rate_Hike.html
Talking Points
- Chinese Yuan: Little Changed Despite Rate Hike
- British Pound: Finds Support at the 200-Day SMA
- Euro: Holds Reversal May Be in the Horizon
- U.S. Dollar:Mixed Across The Board During Monday’s Trade
The EURUSD was relatively unchanged during Monday’s trade amid low liquidity as markets in London was closed in observance of Boxing day, while few traders returned to the desks following the Christmas holiday, while others remain offline ahead of the New Year holiday. With a light economic docket expected for the next 24 hours, traders should not rule out extreme movements. However, heading into 2011, the single currency may continue to face increased headwinds as governments plan to implement tough austerity measures in order to battle their high budget debts. At the same time, debt contagion fears in the Euro-Zone will continue to weigh on the single-currency as market participants place the spotlight on Portugal and Spain after Greece and Ireland tapped into the EU-IMF life-life. As of late, credit default swaps (insurance against default) for Portugal and Spain stands at 496 and 601 respectively.
Meanwhile, the headline during the overnight trade was China’s second's rate hike since October. Though the increase in the country’s borrowing costs was expected, the timing was surprising. The increase in the region’s key overnight lending rate trails consumer prices hitting a 28-month high in November, while retail sales near 20.0 percent. It is also worth noting that unless policy makers can stem the tide of liquidity, the impact of lending this year will keep consumer prices at their elevated levels next year. Today’s increase by the People’s Bank of China may be followed by additional rate hikes due to the fact that raising interest rates may be the most valuable measure to cool household spending, demand for credit, and nonfood price growth. Indeed, there was a lackluster performance today in the global markets, but market participants should not rule out a delayed response. The deferred result would be pressure on the commodity currencies.
The British Pound looks to be carving out a bottom at the 200-day moving average as price action recently broke above its narrow descending channel, and now looks poised retest 1.55. Although the short term technical developments are calling for a slight reversal, the fundamental developments are painting a bearish picture heading into 2011 as the government will implement its toughest spending cuts since WWII. At the same time, policy is becoming increasingly difficult for the Bank of England as inflation stands at its highest level since May and is expected to push higher in the medium term because of the increase in the value added tax (VAT) measures from 17.5 percent to 20.0 percent. Thus, central bankers will be careful about tightening in 2011 as economic activity is expected to slow. Key resistance and support areas for traders going into 2011 will be 1.57 and 1.49 respectively.
U.S. dollar price action remained mixed on Monday, with the USDJPY extending its five day decline, while the New Zealand dollar pushed higher against the greenback. As the economic docket will be fairly muted ahead of the New Year holiday, the drop in market liquidity could lead to whipsaw price action throughout the currency market.
Related Articles: Forex Weekly Trading Forecast - 12.27.2010
FX Upcoming
Currency | GMT | EST | Release | Expected | Prior | ||
No Scheduled Releases | |||||||
Currency | GMT | Release | Expected | Actual | Comments |
JPY | 23:50 | Corporate Service Price (YoY) NOV | -1.2% | -1.1% | Eases modestly after fastest contraction in Oct |
GBP | 00:01 | Hometrack Housing Survey (MoM) DEC | -- | -0.4% | 6th straight contraction |
GBP | 00:01 | Hometrack Housing Survey (YoY) DEC | -- | -1.6% | 3rd straight contraction |
JPY | 01:00 | Small Business Confidence DEC | -- | 45.9 | Remains near 9-month lows |
CNY | 02:00 | Industrial Profits YTD (YOY) NOV | -- | 49.4% | Slowest in 2010, continues weakening trend |
JPY | 04:00 | Vehicle Production (YoY) NOV | -- | -6.7% | 2nd contraction |
JPY | 05:00 | Annualised Housing Starts NOV | 0.831M | 0.847M | Best since March |
JPY | 05:00 | Housing Starts (YOY) NOV | 4.9% | 6.8% | Climbs off 3-month low in Oct |
JPY | 05:00 | Construction Orders (YoY) NOV | -- | -5.3% | 3rd straight contraction |
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