China Ups RRR Once Again; Adds to Pressure on Currencies
Price action has picked up ahead of the North American open, with currencies broadly coming back under pressure following the latest move by China to once again raise the reserve requirement ratio by 50bps to 19.5%. This continues to solidify the ongoing initiative from the Chinese to tighten policy in an effort to offset rising inflation and control excessive growth. PBOC 's Zhou went on to say that the central bank would continue to move in this direction and raise rates further, while also allowing the Yuan to appreciate more. The net result is risk negative as the markets fear that the effect from such policy will ultimately weigh on global recovery prospects.
Relative Performance Versus USD Friday (As of 10:30GMT)
The Euro has all but erased Thursday’s gains, with the China news accelerating declines after the market had already been under pressure from emergency ECB borrowing levels, Portugal bailout talk, and comments from the IFO that the ECB should remain on hold for now. Meanwhile, the Australian Dollar, which is very tied to developments in China, has also given back gains to break back below 1.0100.
Elsewhere, the Pound has been a major outperformer in Friday trade following a much stronger than expected retail sales print. Even with some downward revisions to the previous print, the release still managed to impressively exceed expectations. This has given the Pound a boost with bulls also feeling more comfortable with recent hawkish comments from BOE member Andrew Sentance who isn’t looking as crazy today. Also on the data front, German PPI came in higher but failed to materially influence price action.
Looking ahead, the economic calendar is very quiet with Canada CPI (0.1% expected) due out at 12:00GMT and the only notable release in North American trade. US equity futures and commodities prices trade flat and are consolidating their latest moves. US equity futures trade lower, while commodities are flat.
EUR/USD:The market looks to be in the process of seeking out a fresh lower top below 1.3745 ahead of the next downside extension towards the measured move objective off of a head & shoulders top formation which comes in by 1.3300. Look for confirmation of a fresh lower top on a break back below 1.3425. As such, we like the idea of fading rallies towards 1.3700, with only a break back above 1.3745 negating short-term outlook and giving reason for pause.
USD/JPY: The market continues to remain extremely well bid, with the latest surge back above 83.00 really encouraging longer-term recovery prospects and opening the door for a potential break of key topside resistance by 84.50 over the coming days. Longer-term cyclical studies certainly suggest that the market could be poised for a major bullish reversal and we would look for a break and weekly close back above 84.50 to help confirm outlook. Any dips from here should be well supported ahead of 82.50, while only a break back below 82.00 would concern.
GBP/USD: The market largely remains locked in some consolidation after stalling out by key resistance at 1.6300 several days back. From here, it is difficult to establish a clear directional bias and we will need to see a sustained break above 1.6300 or back below 1.5960 for additional clarity. In the interim, we remain sidelined.
USD/CHF: The market has been in the process of pulling back after stalling out ahead of key short-term resistance by 0.9785 in the previous week. Still we see any additional declines well propped above 0.9425 (minor 78.6% fib retrace) on a close basis and look for the formation of a fresh higher low ahead of the next major upside extension back through 0.9785 and towards more critical resistance by 1.0070 further up. Only a close below 0.9400 will give reason for concern.
A US prime name has led bids in Cable this morning, real money accounts and a German name also seen. Spec types have been repeat dip buyers in Eur/Usd with an ACB on the offer. Cross/Jpy offers seen across the board from two Japanese names early.
Written by Joel Kruger, Technical Currency Strategist
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