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Tuesday January 12, 2010 - 13:59:30 GMT
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EUR USD Rises as China Moves to Raise Bank Reserve Requirements

The U.S. Dollar posted a strong gain overnight against most major currencies as demand for safer assets rose amid speculation that Chinese borrowing costs were set to rise.


A couple of overnight news stories gave the Dollar a boost, both related to China.  The first news story that supported a stronger Dollar was the report that China allowed its first bond yield hike in 20 weeks.  This move by the Chinese central bank served as notice to market participants that bank officials are willing to execute a pre-emptive strategy to prevent the economy from overheating.  This strategy would also include the withdrawal of stimulus measures.


A story by Reuters reporting that China Investment Corp. executive Peng Junming said the U.S. Dollar was likely to appreciate from current levels also provided a boost to the Greenback.  He also reportedly said that both China and the U.S. were on track to raise interest rates in the second half of the year.


Reuters quoted Junming as saying, “I think the Dollar is at its bottom now.  There will be very limited space for the Dollar to drop further.”


The news service also reported his view on the Japanese Yen.  “The Yen is what, I think, has the worst outlook. The Yen will continue to drop, unlike the Dollar, which will not serve for long as a source of funding carry trades.”


Weaker global equity markets also helped buoy the Dollar overnight. This could mean that the inverse relationship between stocks and the Dollar may be re-emerging after taking a brief rest during December. 


There is only one major U.S. economic report today.  Economists are predicting that the November U.S. Trade deficit widened during November.  The data used in this report took place when the Dollar was falling rapidly so it shouldn’t have that great of an impact on today’s trade since the data is stale. Nonetheless, traders should watch for a reaction only if the report is extremely out of line with pre-report guesses.  Economists are predicting that the trade deficit widened to $34.6 billion from $32.9 billion in October.  The fact that imports rose faster than exports is directly attributable to strong demand for foreign goods.


The news from China helped weaken demand for higher yielding assets and consequently the EUR USD which had been poised to move higher in the wake of the soft U.S. jobs outlook from Friday.  Risk appetite could take a hit today, setting up a possible decline over the short-run back to 1.4386.  A turnaround in demand for higher risk assets will put the Euro back on pace to complete a 50% retracement back to 1.4680.


The GBP USD is expected to opening slightly better after falling overnight following a report which showed Britain’s property market unexpectedly lost momentum in December.  The overnight resurgence in the counter-trend rally has helped re-establish support at 1.6036. The main trend is down and will turn up following a rally through the last main top at 1.6240.


Demand for lower-yielding assets is helping to pressure the USD JPY.  The overnight selling pressure has helped create a new main top at 93.77.  Based on the monthly range of 84.83 to 93.77, the chart indicates plenty of room to the downside with 89.30 a potential downside target.  Regaining an uptrending Gann angle at 92.33 will help to put the USD JPY in a strong position once again.


Mixed Japanese economic data hit the market overnight.  It was reported that the current-account surplus grew more than expected in November.  A second report showed that bank lending dropped for the first time in four years.  This was a sign that deflation may be having its effect on loan demands.


Falling demand for higher yielding assets is helping to boost the USD CHF.  In addition, traders are still concerned that the recent rapid rise in the Swiss Franc versus the Euro may bring an intervention by the Swiss National Bank to the market. At this time the USD CHF is ping-ponging inside of a retracement zone at 1.0212 to 1.0143. 


The USD CAD is rallying overnight in a follow-through rally following yesterday’s closing price reversal bottom.  The chart formation suggests that a 50% retracement of the recent break to 1.0498 is likely over the near-term.  The main trend is down, but investors have been covering shorts since late yesterday following comments from Canadian Prime Minister Harper.  He issued a statement expressing his concerns about the rapid rise in the Canadian Dollar and its possible negative effect on the economy.  His comments served as a verbal intervention.  Weaker crude oil and gold could help pressure the Canadian Dollar also today.


News that China may be tightening its monetary policy could lead to a drop in demand for Australian resources.  Yesterday, the AUD USD surged after a greater than expected rise in Chinese imports. In hindsight, this report looks like it may have been a last second buying spree ahead of the possible interest rate hike in China.  The Australian Dollar is under pressure overnight on speculation that demand from China for Australian exports may fall in the future. Technically, the Aussie is holding support at .9214.  Look for an acceleration to the downside if this price is broken.  The chart indicates the next downside target is .9029.


Similar fundamental pressure is building in the NZD USD which could send this pair to .7203 over the near-term.  This is likely to occur despite the news that the New Zealand labor market may be firming.  Overnight it was reported that business sentiment is down, but the outlook for jobs may be improving.  This news could slow down the expected decline in the New Zealand Dollar.


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