US Dollar May Gain as China’s GDP, Inflation Figures Stoke Lending Cutback Fears

Key Overnight Developments

• New Zealand Dollar Fails to Capitalize as Retail Sales, PMI Advance
• Australian Dollar Gains as Vehicle Sales Help Stoke Rate Hike Outlook
• Strong Chinese GDP, Inflation Figures Feed Lending Restriction Fears

Critical Levels



The Euro consolidated losses in Asian trading, oscillating near the 1.41 level to the US Dollar. The British Pound followed suit, trading in a choppy 50-pip range below 1.63. We remain short EURUSD at 1.4881.

Asia Session Highlights



New Zealand’s Retail Sales gained 0.8% from the previous month in November and topping economists’ expectations for a 0.5% result. Sales rose 1.7% over the 12 months from November 2008, the annual increase in 17 months. Business NZ PMI figures also proved supportive, showing the manufacturing sector expanded at the fastest pace in two years. The New Zealand Dollar jumped a bit higher after the figures crossed the wires but the bulls failed to build meaningful momentum, with prices continuing to consolidate yesterday’s losses around the 0.72. Lackluster follow-through hints that risk appetite remains the dominant driver for directional momentum. Indeed, NZDUSD is now 86.8% correlated with the MSCI World Stock Index.

Australian Motor Vehicle Sales rose for the fourth consecutive month in December, adding 3.3%. In annual terms, sales advanced 17.2%, the biggest gain in over eight years. The outcome helped reinforce growing expectations that the Reserve Bank of Australia will press forward with interest rate hikes in the year ahead, with a Credit Suisse gauge of the priced-in yield forecast for the next 12 months rising 7 basis points and helping to lead the Australian Dollar as much as 0.5% higher against its US counterpart in Asian trade.

Perhaps most notably, Chinese Gross Domestic Product figures revealed that the economy expanded at a higher-than-expected annual pace of 10.7% in the fourth quarter while consumer and producer prices surged at the highest rate in 13 months (1.9% and 1.7%, respectively), leading stocks lower on expectations that Beijing will continue to clamp down on lending to cool the buoyant economy. Last week, policymakers began to allow short-term borrowing costs to edge higher and raised bank reserve requirements in a bid to tighten monetary conditions amid worries the Chinese economy may overheat after 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.


Euro Session: What to Expect



Early estimates of January’s Purchasing Manager Index readings are unlikely to offer much support to the beleaguered Euro despite expectations that the figures will show the manufacturing and service sectors continued to expand. Indeed, although German Manufacturing PMI is expected to advance to 52.9 to mark the fourth consecutive month of growth in the industrial space, the outcome will also amount to the smallest increase since the metric began to rebound in February of last year. Similar patterns are expected in the broader Euro Zone PMI figures, with the composite index expected to stall for the first time in 10 months. On balance, this suggests that the pace of recovery in the currency bloc is starting to lose traction, adding to downward pressure to the single currency.

Switzerland’s ZEW Survey of investor confidence rounds out the calendar, with the metric likely to decline for the third consecutive month in January amid growing concerns about the health of the European Union, the mountain nation’s largest trading partner. Overseas sales account for a hefty 53% of the economy’s total output, so softer demand in Switzerland’s main export market do not bode well for the pace of recovery.

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