FOREX: US Dollar on the Defensive Following China Rate Hike News

http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/euro_open/2010/12/27/FOREX_US_Dollar_on_the_Defensive_Following_China_Rate_Hike_News.html

Key Overnight Developments

• US Dollar Gains Short-Lived After Chinese Interest Rate Hike
• Chinese Industrial Profits Point to Further Tightening in 2011
• UK House Prices Decline for Sixth Month, Says Hometrack Ltd

Critical Levels

CCY	SUPPORT	RESISTANCE
EURUSD	1.3082	1.3223
GBPUSD	1.5383	1.5505

The Euro advanced in overnight trade, adding 0.3 percent against the US Dollar, while the British Pound added 0.1 percent against the greenback. Still, both currencies remain locked in familiar ranges established over the past three days. We remain short EURUSD and long USDJPY.

Asia Session Highlights

CCY	GMT	EVENT	ACT	EXP	PREV
JPY	23:50	Corporate Service Price (YoY) (NOV)	-1.1%	-1.2%	-1.3% (R-)
JPY	23:50	BOJ Minutes of Oct. 28 & Nov. 4-5 Meetings	-	-	-
GBP	0:01	Hometrack Housing Survey (MoM) (DEC)	-0.4%	-	-0.8%
GBP	0:01	Hometrack Housing Survey (YoY) (DEC)	-1.6%	-	-1.1%
JPY	1:06	Small Business Confidence (DEC)	45.9	-	45.8
CNY	2:00	Industrial Profits YTD (YoY) (NOV)	49.4%	-	55.0%
JPY	4:00	Vehicle Production (YoY) (NOV)	-6.7%	-	-8.4%
JPY	5:00	Housing Starts (YoY) (NOV)	6.8%	4.9%	6.4%
JPY	5:00	Annualized Housing Starts (NOV)	0.847M	0.813M	0.831M
JPY	5:00	Construction Orders (YoY) (NOV)	-5.3%	-	-5.6%

The US Dollar opened the trading week broadly higher on safety demand after China announced aninterest rate hike over the weekend, stirring fears that a slowdown in the world’s second-largest economy may undermine global growth at large. The greenback failed to sustain upward momentum however, with most of the major currencies recovering toward levels seen at Friday’s close late into the overnight session.

Chinese Industrial Profits rose 49.4 percent in the 11 months through November from the previous year. While this marks the smallest increase in a year, the nonetheless robust result points to continued upward pressure on inflation, hinting Beijing will likely continue to raise interest rates in 2011. Indeed, a survey of economists polled by Bloomberg forecasts rates will rise by 70bps to reach 6.25 percent – the highest since October 2008 – by the second quarter of next year.

UK House Prices slid for the sixth consecutive month in December according to a survey from Hometrack Ltd, with the company’s director of research Richard Donnell saying prices will “remain under downward pressure in the first half of 2011 on the back of weak demand.”

Euro Session: What to Expect

CCY	GMT	EVENT	EXP	PREV	IMPACT
		No Data

With no economic data on tap, currency markets will look to risk sentiment to drive price action. US stock index futures are down 0.3 percent late into the overnight session, hinting the safety-linked US Dollar may regain the early momentum seen at the start of the trading week. However, futures had been down as much as 0.5 percent after traders had their first opportunity to price in Chinese rate hikes news, so sentiment is arguably improved heading into European hours, suggesting the greenback may actually find itself under pressure. Indeed, Asian bourses advanced following Beijing’s announcement, interpreting a move now to translate into a more gradual pace to further tightening in 2011 than had been previously expected.

Generally, the short week between the Christmas and New Years holidays is typically characterized by substantially lower liquidity conditions, producing a period notoriously fraught with spikes of knee-jerk volatility amid otherwise stand-still calm. As such, traders would be wise to exercise extreme caution, both with initiating new positions and managing existing ones.

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