Forex risk appetite boosted on Chinese data

The dollar’s earlier in the session advantage is coming under fire from all sides in initial New York trading. Gains made against European units in Asian trading are fast-disappearing as focus returns to riskier propositions including stocks and commodities, which in turn is boosting demand for the mineral and mining sensitive pair from Canada and Australia. China stood steadfast over the weekend despite predictions that it would tighten monetary policy in light of a sharper gain for consumer prices. Only one half of the prediction came good and it appears that the Peoples Bank has stalled further action until the New Year.

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China– Consumer prices for November were as bad as a press report hinted on Friday with a year-on-year gain of 5.1% picking up from a 4.4% pace. Investors had hoped for a more palatable 4.7% that might allow the central bank to stop at making a 50 basis point increase in its reserve ratio requirements. Producer prices for the month were also sharper than hoped for and rose 6.1% over the previous year and ahead of an expected 5.1% increase. Rising prices and costs continue to build alongside evidence of a still-hot recovery. Other data showed retail sales stood 18.7% higher than a year ago, while industrial production continues its charge with a 13.3% improvement from last year. The three-day economic summit concluded with no clear need to act any further at this stage other than to state that the authorities will continue working towards price stability and that monetary policy will continue to be set in “prudent” fashion. Domestic stocks made up much of their losses from last week and rose 2.9% in Shanghai.

Aussie dollar – The Aussie was flat to lower in Asian trading, partly relieved by no further rate increase from China, but also wary of what the central bank might do in the New Year to further cool the world’s number two economy. However, in New York the Aussie is faring far better rising to a four-day high at 99.19 U.S. cents as local stock futures indicate improving sentiment as the average forecaster predicts stocks will make gains of 11% in 2011. Risk appetite is suddenly starting to blossom with investors jumping into the hot-money trades such as the Aussie dollar. Perhaps they have their eyes once again fixed on a final challenge to parity ahead of Christmas.

Canadian dollar – The Canadian dollar is a little more reluctant to follow the Aussie in early trading although it is clearly strengthening against the dollar. The chart indicates a rising support line stretching back to midweek from a 98.40 low. This morning the Canadian unit is trying to clear above a twice-tested line of resistance at 99.15 U.S. cents and currently stands at 99.14 cents. A successful break could draw prices higher to 99.50 before the day is done with a challenge on parity a prospect for later in the week assuming risk-on remains the trade.

U.S. Dollar – Despite the risk-on theme this morning the dollar remains higher against several currencies leaving its index only a shade lower at 79.79. The greenback faces several hurdles during the week. The Federal Reserve holds its final meeting for the year starting on Tuesday although investors expect no change to policy settings. Last week a University of Michigan consumer sentiment index rose to a six-month high while this week brings on a retail sales report that will test the theory that consumers continue to spend despite a high degree of unemployment. Price data is also scheduled for both producer and consumer series.

Euro – Some of the fear that built up ahead of the start of this week’s trading is slowly dissipating allowing the single currency to rebound against the dollar to $1.3265. Market chatter over the possibility of a break-up of the euro continues to dominate although German and French leaders claim that euro survival is “non-negotiable.” Speculation is likely to drag on throughout the week ahead of an EU summit at which leaders will discuss the a permanent mechanism that would help smaller nations struggling under fiscal austerity measures in order to rein in high budget deficits. French and German leaders continue to point towards the need for budget vigilance and economic cooperation in order to overcome structural weaknesses across the Eurozone. According to CFTC data traders last week redoubled their positions betting that the euro will continue its decline. In order to see those positions pan out accordingly, the euro must breach support at $1.3175.

British pound – Sterling rebounded from a session low at $1.5725 as the dollar came under fire this morning but still remains lower on the day. The domestic economy is ending the year far-stronger than many had assumed heading into a slew of budget and job cuts for 2011. Another gloomy housing report today showed that sellers had lowered asking prices for homes for a second month in December with selling prices down by 3.2% on the month. According to Rightmove property broker the trend is likely to continue in 2011 and it predicts that by the end of next year prices will be 5% weaker.

Japanese yen – Demand for the yen weakened after China failed to raise interest rates over the weekend. The lower perceived need for safe havens kept the Japanese unit under pressure and the trend continues in New York with the dollar remaining higher at ¥84.00. Nevertheless the dollar is off its earlier high when it touched ¥84.35 after successfully accelerating out of a bullish wedge formation on Friday. The yen is also weaker against the euro at ¥111.50 and against a rising Australian dollar, which buys ¥83.30.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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