Dollar Soars as China Surprises Markets with Reserve Requirement Hike
The U.S. Dollar is soaring as China surprised the Forex markets
with a 50 basis point hike in its bank reserve requirements. This move by China is an
attempt to cool credit without tightening interest rates. The intention of Chinaâ€™s central
bank is not to derail the economy but to preserve its expansion. The easy flow
of stimulus money has created a potentially overvalued real estate and housing
bubble in China.
This morningâ€™s move by China
to raise bank reserves by 50 basis points on February 25th is the central
bankâ€™s attempt to avoid an asset bubble.
Thin volume in Asia contributed to this morningâ€™s strong
rally in the Dollar as many traders were taking the day off ahead of the start of
the weeklong Chinese New Year holiday and the extended U.S. holiday
Also contributing to the strong rally in the Dollar was the
weaker Euro. Poor German and Euro Zone economic data as well as the lack of
solid steps by the European Union to help Greece were also bearish
Several days of tight trading ranges contributed to the
overnight weakness in the EUR USD as volatility returned in a big way once
fresh 2010 lows were reached. Worse than expected German and Euro Zone GDP
reports ignited the break with the news from China providing additional fuel to
the sell-off.The news that GDP did not
continue prolong the uptrend from the last two quarters sent a signal to the
markets that the global recovery may be faltering or stalling.The poor GDP reports should provide more
incentive to EU members to get the Greece situation straightened out.
While the news from China
and the poor Euro Zone economic data are making the headlines overnight,
investors are still expressing their dissatisfaction with the proposal by the
European Union to rescue Greece
from an economic disaster.Although the
EU is ready to assist Greece
if needed, support for the plan remains uncertain. This suggests that
additional measures may be necessary. This translates into outside money may be
required. Talk is swirling that the International Monetary Fund stands ready to
come in if necessary.
Bearish traders are sitting on a record amount of short
positions against the Euro. These traders feel that the current plan will fall
short in helping Greece
tackle its fiscal deficit. EU nations are throwing their support behind the
plan as a show of solidarity rather than posting real money. The European
Central Bank threw its support behind the pact in an effort to boost solidarity
by saying the ECB will work with the EU.ECB President said the central bank will work with the struggling nation
â€śin monitoring the implementation of the recommendations by Greece.â€ť
economic reports include Retail Sales which is expected to be up 0.3%. The University of Michigan Confidence Index is expected to
come in at 74.8.Business Inventories
should be about 0.2%.
The GBP USD is reversing yesterdayâ€™s strong rally. The
weaker Euro and the bearish news from China are the catalysts behind this
morningâ€™s weakness. Traders are also concerned about the weak economy and the
possibility of extended stimulus. Finally, investors are worried that problems
similar to the issues in Greece
will flare up in the U.K.
The weaker Euro and rumors of possibly more intervention by
the Swiss National Bank is helping to boost the USD CHF.The SNB is making a stand to weaken its
currency against the Euro in an effort to stave off deflation.
A sharp drop in crude oil and gold is helping to fuel the
rally in the USD CAD. The overnight action is erasing some of this yesterdayâ€™s
Risk aversion is helping to pressure the AUD USD and NZD
USD. Chinaâ€™s move to tighten
credit could have adverse effects on the Australian and New Zealand
economies.Weaker gold and equities
could encourage additional selling pressure throughout the day.
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Mon 18 Dec
10:00 EZ- final HICP Tue 19 Dec
09:00 DE- IFO Survey
13:30 US- Housing Starts/Permits
13:30 US- Current Account Wed 20 Dec
15:00 US- Existing Homes Sales
15:30 US- EIA Crude Thu 21 Dec
03:00 JP- BOJ Decision
13:30 CA- CPI & Retail Sales
13:30 US Weely Jobless
13:30 US- GDP Fri 22 Dec
09:30 US- GB- GDP
13:30 US- core PCE Deflator & Presonal Income
15:00 US- New Homes Sales
15:00 US- final University of Michigan
17:00 US- early Closes Mon 25 Dec
00:00 Christmas Holidays
Potential Trading Opportunities
POTENTIAL PRICE RISK: Medium Mon--10:00 GMT-- EZ- final November HICP. flash data are rarely changed.
POTENTIAL PRICE RISK: HIGH- Medium Tue --09:00 GMT-- DE- IFO Survey. Key report but usually not a market-mover
POTENTIAL PRICE RISK: HIGH- Medium- Tue --13:30 GMT-- US- Housing Starts and Permits. Leading indicators of activity
POTENTIAL PRICE RISK: HIGH-Medium- Wed --15:00-- US- Existing Homes Sales. Top Housing statistic
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