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Monday, 20 February 2012 08:12

Forex Market Update: Another Greek Week, But China Hits Headlines By Easing Policy

Economic Data Highlights

  • CA Jan. CPI out at +0.4% m/m, +2.5% y/y vs. 0.3%/2.3% expected and -0.6%/+2.3% prior resp.
  • CA Jan. Leading Indicators out at +0.7% m/m vs. 0.6% expected and revised 0.7% prior
  • US Jan. CPI out at +0.2% m/m, +2.9% y/y vs. 0.3%/2.8% expected and flat/3.0% prior resp.
  • US Jan. Core CPI out at +0.2% m/m, +2.3% y/y vs. 0.2%/2.2% expected and 0.1%/2.2% prior resp.
  • US Jan. Leading Indicators out at +0.4% vs. 0.5% expected and revised 0.5% prior
  • NZ Jan. Performance of Services Index out at 53.6 vs. revised 50.9 prior
  • JP Jan. Merchandise Trade Balance out at -¥1475.0 bln vs. -¥1456.3 bln expected and revised -¥205.6 bln prior
  • UK Feb. Rightmove House Prices out at +4.1% m/m, +1.4% y/y vs. -0.8%/+0.4% prior resp.


  • JP Leading/Coincident Indices (0500)
  • JP Dept. Store Sales (0530)

Market Comments

The surprise over the weekend came not from Greece, for a change, but from China, which announced a 50bp reduction in the Reserve Ratio Requirement for banks. This is expected to add some Yuan 360-400 bln of additional liquidity into the local banking system. Observers looking for reasons behind the move suggest everything from tighter local liquidity conditions due to technical reasons, to unimpressive new loans data and money supply growth in January, but also incude the release of very weak house price data at the weekend. House prices recorded their worst performance in at least a year with none of the 70 cities monitored by the authorities recording any price increases. Almost 70% recorded lower prices with the rest unchanged from December.

The China easing saw a greater appetite for risk at the Asia open this morning with EURUSD gapping 60 pips higher from NY closing levels Friday, and AUDUSD gapping 40 pips higher. We also saw broad-based cross JPY buying which helped USDJPY to edge closer to the key 80.0 mark. Yet after the early, fast action, the rest of the session was spent consolidating at higher levels, no doubt waiting for the next news headline from Greece or the EU meeting later today.

On the data front we heard that UK house prices surged by 4.1% compared to a month earlier, the highest monthly increase in almost 10 years and were up 1.4% from a year earlier. Rightmove noted that the availability of mortgage deals and terms requiring lower deposits were giving a prop to property prices while a more dovish interest rate outlook was helping an increase in demand.

From Japan we saw the merchandise trade balance for January which recorded a record deficit of ¥1475.0 bln on the month, with a sharp increase from the ¥205.6 bln seen in January. Weak demand from Asia, especially China, can be attributed in some part to the timing of the Lunar New Year celebrations. Exports to Asia (which account for more than half of Japan’s total exports) fell 13.7% y/y while those to China (Japan’s largest trading partner) fell by a larger 20.1% y/y. In contrast, exports to the US rose by a small 0.6% y/y.

Friday was a day of consolidation, with Greek hopes promoting a greater tolerance for risk. On the data front, US CPI numbers were mixed but close to expectations with month-on-month CPI below f/c at +0.2% versus 0.3%, but year-on-year numbers firmer at +2.9% versus 2.8% expected. Core CPI pushed up to 2.3% y/y, its highest level since September 2008. Leading indicators were down slightly at +0.4%.

The surprise came from UK retail sales, which powered higher to +0.9% m/m and +2.0% y/y, continuing the recent trend of better data out of the UK.

Note a US holiday today and there are no data releases scheduled for the rest of today from either Europe or North America.

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