Dollar revived by Chinese rate increase

China once again hid behind holiday festivities to announce its third interest rate increase since mid-October in an effort to boost savings, channeling surplus cash away from investments and new construction. Asian stocks had continued to rally and had no chance to respond after hours as the Peoples Bank announced its decision towards the end of celebrations surrounding the new lunar year. Copper and oil prices accelerated a recent reversal on fears that China is unhappy about prices of raw materials feeing through into a headline CPI expected to rise to 5.3% next week when data for January is released. The dollar edged forward only slowly in response but it does appear that the Chinese action might serve to undo some of the recent optimism over global recovery.

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U.S. Dollar – Although still saddled with losses against the euro and yen, the dollar index is off a session low following the Chinese announcement. But since the news, it has made session highs against the pound as well as commodity dollars as investors signal a thumbs-down as far as risk appetite goes. Later this morning an index of optimism amongst small business owners is expected to rise to its highest in four years, adding to evidence yesterday when credit expanded among consumers at four-times the forecast pace. Currently the dollar index is lower by 0.3% at 77.92.

Japanese yen – There was plenty of data out of Tokyo overnight, but hardly anything substantial enough for traders to propel the yen in either direction. Trade data revealed little new while lending data contracted at a slower pace in line with the thought process that the Japanese economy is emerging from a slower phase of activity. The yen rallied a half yen after a dollar gain on Monday and reached ¥82.00 before the dollar recovered to ¥82.20.

Euro – The single currency appeared to shake off an unexpectedly weak reading for German industrial activity in December. Analysts had forecast a marginally positive performance to end the year, yet data released this morning showed a drop of 1.5% in output. Over the year output gained 10%. The euro, however, keeps banging its head up against $1.3660, which is proving a tough nut to crack and could mark the top of the session assuming investors follow-through on earlier signs of tempered enthusiasm for risk.

British pound – British Chancellor of the Exchequer wasted no time in accelerating the banking tax as the financial sector began to show signs of added stability. George Osbourne brought forward a tax that measures the long and short-term liabilities of banks and takes a small slice. By accelerating the initiative he expects to raise £800 million before the end of the 2010 financial year boosting the overall tax take to £2.5 billion as a result. With the financial sector comprising 21% of the FTSE 100 benchmark stock index investors have reduced holdings today given the diversion of profits away from shareholders to the Treasury. The pound also suffered on the back of the move with the euro gaining 0.5% to buy 84.73 pence, while sterling appears to be on the verge of a bigger fall against the dollar at $1.6086.

Canadian dollar – Early morning gas for the Canadian unit evaporated after crude oil prices were further pressured on the back of China’s move to restrain demand. The Canadian dollar reached a high ahead of the Beijing announcement at $1.0131 U.S. cents before becoming a cropper and falling to $1.0087. Despite this the domestic economy continues to move ahead nicely. Monday’s data showed a roughly in-line gain for building permits during December with a 2.4% gain. Later this morning the pace of housing starts is expected to rise at an annualized pace of 173,500.

Aussie dollar – The Aussie surged to $1.0189 overnight on rising business confidence, which reached positive territory for the first time since August. Business conditions slid from an index reading of +6 to -6 on account of flooding while the National Australia Bank’s business confidence survey rose from -3 to +4 during January. The Aussie felt the weight of Chinese efforts to cool its economy and slid to $1.0114 before recovering to almost unchanged on the day.

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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