Warren Buffett“A public opinion poll is no substitute for thought.”
Adlin Sinclair“Success is a welcomed gift for the uninhibited mind.”
Air of panic sends dollar running rampant
Tue, Jan 26 2010, 14:26 GMT
The enactment of a previously announced rise in the
reserve ratio requirements at China’s banks has created a bearish tone for risk
on Tuesday sending equity prices back down and raising the self-worth of the
dollar. Weighing on sentiment is a downgrade to the outlook for Japan’s
sovereign debt and a lackluster crawl out of the growth cesspit in Britain.
Meanwhile core European confidence was surprisingly strong but the day so far
belongs to a dollar that started the week with a never-say-die attitude. The
People’s Bank of China stepped up lending restrictions mid-January and investor
paranoia is leading to an acceleration of the view that China will move to
thwart rampant growth to the detriment of the global economy. Going unnoticed in
today’s market activity, however, is the fact that today marks the first week in
three when the PBOC failed to increase the yield on the 12-month bill at its
regular weekly auction.
U.S. dollar –
Ignoring Monday’s interruption to risk aversion, the dollar is
proceeding where it left off last week as risk aversion appears to be popping up
all over the map. A downgrade to the Japanese sovereign debt outlook and
investors still nervous over prospects for growth in China as the central bank
implements higher deposits from its banks have maintained a high reading on the
risk barometer today. As a result S&P futures are lower ahead of the U.S.
opening in line with weakness for Asian and European stocks. It appears that
there’s still a greater resistance to allowing the pro-growth camp to make their
case. The dollar index is higher, while fixed income is feeling the benefit of
minor measures announced from the U.S. government yesterday when it delivered a
three-year freeze to certain spending categories.
–S&P indicated that the Japanese government was running out of options in
dealing with economic weakness and cut Japan’s long-term sovereign rating from
stable to negative. Despite the downgrade the yen was bought given the souring
of the tone created by the Chinese banking measures. Investors bought the yen
and sold positions taking advantage of the wide yield differential to be made
from holding assets in other currencies and asset classes. The yen advanced
against the dollar to ¥89.67, while jumping two yen to the pound at ¥144.52.
Investors had been anticipating that the economy of the
United Kingdom would convincingly cast off the shackles of recession in the
final quarter of last year with a decent rebound to a 0.4% quarterly pace of
growth. So you can perhaps imagine the disappointment with which investors
greeted a mediocre 0.1% reading this morning. Investors concerned that consumers
still continuing to deleverage personal balance sheets will further restrain the
current quarter data shed the pound today forcing it down to $1.6103 in early
New York trading. Sterling also gave back recent gains made against the euro and
is trading this morning at 87.33 pence.
The euro is
lower on Tuesday despite a couple of decent pieces of noteworthy news. The
overall risk averse tone is keeping a lid on any effort to rise made by the
single European currency. The German IFO survey of business confidence for
January rose from 94.7 to 95.8 probably due to improving export markets.
Meanwhile data also showed the strongest gain in consumer spending in over a
decade in France, which on any other day of the year might have helped lift
sentiment towards the euro. Spending on car purchases due to government
incentives is the probable cause for the strong reading in spending, raising the
prospect that the run won’t last. Still, it should underscore a positive fourth
quarter GDP report.
Flushed with confidence after Monday’s sale of five-year
paper the government of Greece today announced the February issuance of 10-year
paper. Despite the confluence of better data and a reprieve from some of the
recent peripheral market pressure, Eurozone stocks fell after losses were
sustained across Asian bourses overnight. The euro is lower against the dollar
at $1.4081 and is down to its lowest point since April 2009 against eth Japanese
yen at ¥126.27.
It’s a national holiday in Australia, but its currency has
weakened on the back of the Chinese moves to restrain lending. Adding to the
pressure on the Aussie unit today, which is lower at 89.65 U.S. cents is news
that several of China’s banks face higher deposit reserve requirements in the
order of an additional 0.5% according to a Reuters story doing the rounds. Being
Australia’s biggest customer, the potential for a slowdown undermines investors’
appetite for its dollar.
The local dollar is coming off the weakest reading against the
U.S. dollar in a month after crude oil and base metal prices reacted negatively
to the China story earlier today. Canada’s dollar touched 93.82 cents in early
trading before rallying to 94.05 cents before 8am ET