China Tightens Reserve Ratio
02/05/10 20:54
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China Tightens Reserve Ratio
China tightened its required reserve ratio by another 50bp, to 17%, over the weekend. This is the third 50bp increase this year and newswires suggest the measure will drain about CNY300bln of cash from the economy. This move comes right on the heels of a series of measures aimed at cooling down the property market and the wider economy. As such, expect risk FX to be affected by the news as fears grow over additional tightening measures to come, not only in China, but across emerging markets. Hong Kong is open today despite Japan and China begin closed for holidays.
This step will once again stoke CNY revaluation expectations, and UBS economists believe that a Q2 move is still on the cards. The next major deadline is the Sino-US strategic and economic dialogue, due to be held in Beijing on May 24-25. If there is still no action or commitment on CNY revaluation by that time then tensions could resurface. Geithner cannot delay the Treasury report on currencies indefinitely, and trade disputes with China are bound to be a point of contention at the US mid-term elections. Significantly perhaps, China's finance minister commented overnight that China will not let the CNY rise sharply, but there was no ruling out of a gradual move.
China Tightens Reserve Ratio
China tightened its required reserve ratio by another 50bp, to 17%, over the weekend. This is the third 50bp increase this year and newswires suggest the measure will drain about CNY300bln of cash from the economy. This move comes right on the heels of a series of measures aimed at cooling down the property market and the wider economy. As such, expect risk FX to be affected by the news as fears grow over additional tightening measures to come, not only in China, but across emerging markets. Hong Kong is open today despite Japan and China begin closed for holidays.
This step will once again stoke CNY revaluation expectations, and UBS economists believe that a Q2 move is still on the cards. The next major deadline is the Sino-US strategic and economic dialogue, due to be held in Beijing on May 24-25. If there is still no action or commitment on CNY revaluation by that time then tensions could resurface. Geithner cannot delay the Treasury report on currencies indefinitely, and trade disputes with China are bound to be a point of contention at the US mid-term elections. Significantly perhaps, China's finance minister commented overnight that China will not let the CNY rise sharply, but there was no ruling out of a gradual move.
Today, markets will likely react cautiously to the
new tightening move, but we don't expect an
aggressive selloff along the lines of January,
especially with the Greece news giving investors a
lift.
UBS economists note that although half of the Q1 growth reflected a rise in inventories, inventory-related effects could still continue to boost growth in future quarters. Also, this is the third consecutive positive quarter for private final demand, a key signpost used by Chairman Bernanke to gauge sustainability and the print is consistent with the view that the Fed Funds target will likely rise to 0.5% by end-2010.
Today, we expect the manufacturing ISM index for April to show a further pick-up to 61.0 (cons 59.8, prev. 59.6). Later this week, we forecast non-farm payrolls for April to show a substantial ahead-of-consensus rise to +250k (cons. +200k, prev. +162k), with about half of the increase accounted for by private hiring, with the other half being census-related.
We see the dollar deriving further strength from its gradual shift towards becoming a growth currency, as the US economic recovery continues to gather pace.
Negotiations have concluded between the IMF, the EU, the ECB and Greece on the terms of a 3 year economic and financial adjustment program. The Greek cabinet accepted the proposals and, following a favourable assessment by both the EU Commission and the ECB, the Eurogroup of Finance Ministers endorsed the plan.
The size of the package is consistent with last week's media speculation and amounts to EUR 110 bn, including a EUR 10 bn contingency fund ear-marked to help stabilise the Greek banking system should a recapitalization be needed. An unnamed IMF official said that stress-tests revealed additional capital may be required but that capital needs in general are "surprisingly low".
Eurozone member states will provide EUR 80 bn of the package in the form of bilateral loans, and the IMF will offer EUR 30 bn via a standby arrangement. EU Commissioner Rehn said there has been no change to the interest rate the bi-lateral loans will carry, and this remains at 'around 5%'.
There was little further news about the IMF's contribution to the plan, although IMF Managing Director Strauss-Kahn said that he anticipated a decision from the Executive Board this week.
ECB President Trichet, also present at the press conference, said that "absolutely no decision" has been taken on the possible purchase of government bonds by the ECB, although he did not appear to rule it out. Elsewhere, ECB Executive Board Member Bini-Smaghi dismissed as "just speculation" suggestions that the ECB might consider providing additional liquidity or buying government bonds, and ECB Governing Council Member Weber denied that the Eurozone economy is on the brink of a new crisis.
We expect the euro to find some support on the back of positive news flow today and over the next weeks. However, the downtrend is likely to reassert itself as attention shifts away from liquidity concerns and towards the unresolved structural problems that caused the fiscal strain in the first place. Our 3m EURUSD forecast remains at 1.30.
The twin highlights of the week will be the RBA policy decision on Tuesday, followed by Friday's Monetary Policy Statement. We expect another 25bp hike, which would take the policy rate back to "average" levels. Although investors will doubtless scrutinize the policy statement to help gauge the future path of the cash rate, the MPS may prove to be a better guide as to the RBA's intentions. Retail sales are due on Thursday and we are well ahead of the consensus, expecting a rise to +1.0% (cons. +0.7%, prev. -1.4%).
The government completed its assessment of the Henry Tax review, and opted to introduce a new mining resource tax of 40% from July 2012 with the intention of raising A$12 bn in the first 2 years. We see this as a broadly positive development as some of the savings made will be used to reduce tax on non-mining companies, thus helping to re-balance the economy.
Pro Traders Club:
We are cautious on our risk longs AUDJPY, but will still trade it actively, short term.
We believe broad based risk aversion is setting up and a pullback in equities is threatening. This will be USD and JPY supportive and AUD, NZD, CAD negative. See "Citi" bank report posted today.
Source: UBS, Bloomber, Chris Lori
UBS economists note that although half of the Q1 growth reflected a rise in inventories, inventory-related effects could still continue to boost growth in future quarters. Also, this is the third consecutive positive quarter for private final demand, a key signpost used by Chairman Bernanke to gauge sustainability and the print is consistent with the view that the Fed Funds target will likely rise to 0.5% by end-2010.
Today, we expect the manufacturing ISM index for April to show a further pick-up to 61.0 (cons 59.8, prev. 59.6). Later this week, we forecast non-farm payrolls for April to show a substantial ahead-of-consensus rise to +250k (cons. +200k, prev. +162k), with about half of the increase accounted for by private hiring, with the other half being census-related.
We see the dollar deriving further strength from its gradual shift towards becoming a growth currency, as the US economic recovery continues to gather pace.
Negotiations have concluded between the IMF, the EU, the ECB and Greece on the terms of a 3 year economic and financial adjustment program. The Greek cabinet accepted the proposals and, following a favourable assessment by both the EU Commission and the ECB, the Eurogroup of Finance Ministers endorsed the plan.
The size of the package is consistent with last week's media speculation and amounts to EUR 110 bn, including a EUR 10 bn contingency fund ear-marked to help stabilise the Greek banking system should a recapitalization be needed. An unnamed IMF official said that stress-tests revealed additional capital may be required but that capital needs in general are "surprisingly low".
Eurozone member states will provide EUR 80 bn of the package in the form of bilateral loans, and the IMF will offer EUR 30 bn via a standby arrangement. EU Commissioner Rehn said there has been no change to the interest rate the bi-lateral loans will carry, and this remains at 'around 5%'.
There was little further news about the IMF's contribution to the plan, although IMF Managing Director Strauss-Kahn said that he anticipated a decision from the Executive Board this week.
ECB President Trichet, also present at the press conference, said that "absolutely no decision" has been taken on the possible purchase of government bonds by the ECB, although he did not appear to rule it out. Elsewhere, ECB Executive Board Member Bini-Smaghi dismissed as "just speculation" suggestions that the ECB might consider providing additional liquidity or buying government bonds, and ECB Governing Council Member Weber denied that the Eurozone economy is on the brink of a new crisis.
We expect the euro to find some support on the back of positive news flow today and over the next weeks. However, the downtrend is likely to reassert itself as attention shifts away from liquidity concerns and towards the unresolved structural problems that caused the fiscal strain in the first place. Our 3m EURUSD forecast remains at 1.30.
The twin highlights of the week will be the RBA policy decision on Tuesday, followed by Friday's Monetary Policy Statement. We expect another 25bp hike, which would take the policy rate back to "average" levels. Although investors will doubtless scrutinize the policy statement to help gauge the future path of the cash rate, the MPS may prove to be a better guide as to the RBA's intentions. Retail sales are due on Thursday and we are well ahead of the consensus, expecting a rise to +1.0% (cons. +0.7%, prev. -1.4%).
The government completed its assessment of the Henry Tax review, and opted to introduce a new mining resource tax of 40% from July 2012 with the intention of raising A$12 bn in the first 2 years. We see this as a broadly positive development as some of the savings made will be used to reduce tax on non-mining companies, thus helping to re-balance the economy.
Pro Traders Club:
We are cautious on our risk longs AUDJPY, but will still trade it actively, short term.
We believe broad based risk aversion is setting up and a pullback in equities is threatening. This will be USD and JPY supportive and AUD, NZD, CAD negative. See "Citi" bank report posted today.
Source: UBS, Bloomber, Chris Lori