US Dollar Gains on Safety Demand as Chinese Borrowing Costs to Rise

Key Overnight Developments

• US Dollar Higher as China Allows First Bond Yield Gain in 20 Weeks
• New Zealand Firms Say Labor Market Firming, NZIER Survey Shows
• Japan: Trade Surplus Narrows, Deflation Continues as Lending Drops
• UK House Prices Pressured Higher Despite December Setback, Says RICS
• Australian Lending Falls Most in 18 Months on RBA Rate Hikes

Critical Levels



The Euro traded lower in Asian hours, slipping as much as -0.4% against the US Dollar. The British Pound followed suit, testing as low as 1.6063 against the greenback. We remain short EURUSD at 1.4881 and short GBPUSD at 1.6648.


Asia Session Highlights



The US Dollar traded higher and stocks declined across Asian exchanges with investors seeking safety after China allowed the yield on its 1-year central bank bill to rise for the first time in 20 weeks, hinting that policymakers are becoming worried about overheating the economy and may start to tighten monetary conditions. Yesterday, economists at the Chinese Academy of Social Sciences said GDP may grow as much as 16% this year, threatening to set off rapid inflation and a property bubble. The researchers cautioned that “if the government continues with the same strength of macro-economic stimulus as in 2009, there will be notable economic overheating in 2010.” Comments from China Investment Corp, the Asian giant’s sovereign wealth fund, also boosted the Dollar after it predicted that the greenback is unlikely to weaken further this year.

New Zealand’s NZIER Business Opinion Survey showed that sentiment soured a bit in the fourth quarter after surging to a decade high in the three months through September. The details of the report looked more encouraging than the headline figure, however, as the decline looked to be accounted for by lower readings on sub-indexes tracking ease of finding labor. Tighter hiring conditions now and expectations of more of the same in the second quarter hint that the jobless rate may start to moderate after hitting a 9-year high at 6.5%, helping to bolster New Zealand’s economic recovery by boosting disposable incomes and encouraging consumption growth.

Japan’s Current Account surplus narrowed less than economists expected, printing at 1.1 trillion yen in November versus 1.4 trillion in the previous month. Economists were calling for a 0.9 trillion outcome ahead of the release. The surplus had trended higher since hitting a record low in January 2009 as imports declined at a markedly faster pace than exports. The same pattern held this time around but the gap in negative growth rates narrowed, leading to a smaller surplus. Indeed, overseas sales contracted just 7% from the previous year, the smallest drop since September 2008, while outbound shipments fell -18.2% over the same period, the least in a year. Meanwhile, December’s monetary aggregate figures pointed to continued deflationary pressure: the annual growth rate of the M3 Money Stock (the broadest measure of money supply) fell to 2.2%, marking the first decline since June, and Bank Lending shrank 1% to reveal the biggest drop in over 4 years. Finally, the Eco Watchers survey showed that merchant sentiment improved in December, with respondents in the retail and manufacturing sectors predicting improving conditions over the next three months.

UK House Prices faltered n December as a survey by the Royal Institution of Chartered Surveyors showed that the number of polled real estate agents reporting higher property values exceeded those reporting declines by 30%, down from 35% in the previous month to mark the first decline since February. Preliminary forecasts called for a 37% result, making the outcome all the more disappointing. Still, RICS said that that shallow supply will continue to put upward pressure on prices in the months ahead despite the temporary setback.

Australian Home Loans tumbled -5.6% while the overall Value of Loans fell -2.9% in November, registering the largest declines since May 2008, as three consecutive rate hikes from the Reserve Bank of Australia filtered through into the economy and discouraged borrowers. The outcome led traders to pare back expectations for additional tightening, with a Credit Suisse gauge of priced-in rate increase expectations over the next 12 months falling slipping 5 basis points.


Euro Session: What to Expect



A light economic calendar awaits traders in European hours. The UK Visible Trade Balance deficit is set to narrow to -7.0 billion pounds in November from -7.11 billion recorded in the previous month. A weaker currency may have been behind the improvement: the British Pound fell 1.6% in trade-weighted terms in November, making UK-made products cheaper for foreign buyers and encouraging exports. Separately, the Department for Communities and Local Government (DLCG) is set to report that House Prices rose 0.1% in the year to November, marking the first positive outcome for the metric since June 2008. Still, the news is unlikely to be particularly market-moving with timelier private-sector surveys assuring that the state of the housing market is already well priced into the sterling exchange rate.

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