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Surprise Chinese Tightening Hits Euro, Aussie Hard

Last updated 2/12/2010 5:57 AM ET (GMT -5) 9 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• China surprises marktes with 50bp resevre requirement raise
• Eurozone GDP misses by a mile at 0.1% vs. 0.4% eyed
• Equities plunge in wake of Chinese tightennng news
• Oil drops a dollar to $74/bbl
• Gold off highs but modest decline to $1082/oz.

Overnight Eco

• JPY Household Confidence 39.0 vs. 38.2 expected
• NZD Retail Sales 0.0% vs. 0.7%
• EUR German Prelim GDP 0.0% vs. 0.2%
• EUR French Prelim Non-Farm Payrolls -0.4% vs. -0.2%
• EUR Flash GDP 0.1% vs. 0.4%
• EUR Industrial Production -1.7% vs. 0.3%
• GBP CB Leading Index 0.4%

Event Risk on Tap

• CAD New Motor Vehicle Sales expected at 2.0%
• USD Prelim UoM Consumer Sentiment expected at 74.7

Price Action

• USD/JPY drops below 90.00 on Chinese news but hold bid relatively well
• AUD/USD loses nearly 100 points to 88.20 but holds figure so far
• GBP/USD slides back towards 1.5600 of Chinese news
• EUR/USD hits news 8 month lows but 1.3550 holds for now

Growth was hit from all sides today as weak Eurozone economic results combined with a surprise announcement from PBOC that the Chinese central bank was raising reserve requirements another 50bp pushed EUR/USD to a fresh 8 month low in morning European trade. EZ eco data disappointed all around with Q4 GDP numbers printing at an anemic 0.1% vs. 0.4% eyed while Industrial Production unexpectedly declined to -1.7% vs. 0.3% forecast.

However, the true shock on the night was an announcement by PBOC officials made post Asian market close that reserve requirements will be raised once again. Coming almost at the same time as the weak EZ eco data, the surprise policy action by the Chinese authorities had all the impact of rubbing salt on a wound for risk currencies as euro, Aussie and pound all tumbled precipitously in the aftermath of the news.

The EUR/USD, already weakened by the disappointing data and the negative market sentiment towards the Greek deal, dropped 60 points in reaction the news, but the Aussie was hardest hit losing more than 100 points off its peak  as traders worried about the impact of Chinese tightening on Australian growth. Yesterday we noted, “The pace of credit growth in China is clearly unsustainable and Chinese monetary officials will need to act decisively quite soon to curb the real estate bubbles forming in the country’s urban areas. Ultimately it is this coming wave of Chinese monetary tightening that concerns Australian policymakers and will therefore result in only gradual rate hikes from the RBA throughout 2010.”

With risk off once again the theme of the day,  high beta FX may see further pressure as trading progresses in to the North American session.  The US eco calendar has Retail Sales and  the U of M data today. Given  the  weakness in the IBD reading earlier this week, chances are good that consumer sentiment soured in February which could weigh on the risk trade going into the weekend.  For  EUR/USD the 1.3500 remains key support and if broken later today could augur even further weakness ahead.

FX Upcoming

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Comments (9)

hsbc

February 12, 2010 at 07:08 AM ET

actually most of the chinese banks knew of the reserve hike before today

schultzz.at

February 12, 2010 at 07:37 AM ET

The GDP reports this morning only confirmed the dismal state of the European economies. Germany seems to be in a consumer and business investment recession, while trade is supporting the economy. France reported robust domestic demand, but the trade deficit is a drag.

In the meantime, German Chancellor Merkel's coalition partner, the Free Democratic Party, seems to oppose a bailout of Greece.
Bloomberg cites Carl-Ludwig Thiele, the FDP's financial-policy spokesman: “Our citizens can’t be expected to pay for the consciously flawed fiscal and budgetary polices of other euro-zone countries”

I am somewhat doubtful that we will see a follow trough in the euro today. The looming U.S. holiday could be supportive to risk assets. Nevertheless, the euro seems to be unable to perform some more pronounced retracement.
I am preparing for a wholesale move out of euros. At the moment, the 1.40s seem to be out of sight, maybe we see quotes below 1.30 soon.
Tom Schultz.

alexjbrandt

February 12, 2010 at 09:13 AM ET

The EU meeting was a big disappointment. First Merkel said everyone was on board for support and then hours later its apparent not everyone is on board. Then Merkel saying they would review everything in March! It'd be easier if they had a federalist system like the US of if the ECB could set up and guarantee some loans. I have to agree, 1.40 seems like a long shot right now. Maybe next week we get more details about a assistance package for PIGS. Until then 1.35 seems to be the support level.

hsbc

February 12, 2010 at 10:00 AM ET

wat do u reckon of buying gbp? it seems cheap

FXDragon

February 12, 2010 at 05:23 PM ET

We should see some rally in high beta and commodities soon. I wanna say next week.

FXDragon

February 12, 2010 at 05:26 PM ET

How 'bout do the opposite of what i say. You know you'd be rich by now:))

hsbc

February 13, 2010 at 12:40 AM ET

ok take you for a mirror

FXDragon

February 13, 2010 at 03:56 AM ET

I say risk fx will end next Friday's session at positive territory comparing to last week's close.
Who agrees who doesnt dear traders? It'd be fun to compare bets lets play.

Regards,

hsbc

February 13, 2010 at 12:01 PM ET

ok i say that eur will be lower than 1.37 by end friday and aud fails to break 0.90

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.