After seeing some jumpstart action in early Monday trade, all currencies have quickly traded back towards or near daily opening levels. The one minor exception is the Pound which relatively underperforms on the back of Hometrack house prices which showed a sixth straight monthly decline. However, the big story on the day has undoubtedly been the latest 25bp China rate hike announced on Christmas Day.
Initial market reaction was as to be expected with currencies weighed down, led by the closely correlated Australian Dollar. But lack of any real market presence on the thin trade resulted in some whipsaw price action back towards opening levels. Australia, New Zealand and the UK markets are all closed on Monday, while many other countries are still unofficially on holiday. As such, we would continue to expect to see some light trade over the course of this week and into the first week of 2011.
Japanese markets were open and the Yen has mostly been consolidating, with a number of economic releases failing to materially factor into price action. Market participants have been less focused on economic releases and instead having been paying attention to the latest political polls which show the disapproval rating for PM Kan’s cabinet rising to an all-time high of 67%. A Nikkei poll confirms general sentiment showing the government approval rating dropping below 30% for the first time.
In our opinion, the moves by China to raise rates are quite significant and from a currency standpoint, should significantly weigh on the Australian Dollar and other commodity currencies over the coming year. The tighter monetary policy will likely slow down growth in China which in turn will curb demand for commodities. As such, we see this as a major theme over the coming year and with the Australian Dollar trading by cyclical highs, we see these China moves acting as the catalyst for the start to a critical bearish trend shift in the antipodean.
Looking ahead, all is quiet on the economic calendar for the rest of the day, and we mostly expect markets to trade accordingly. We could see a bit more action and volatility into Europe and North America in response to the latest China moves, but that should be the only thing that factors into price action. Of course, market participants should always be on the lookout for additional ratings warnings and downgrades on the beleaguered Eurozone economies. UK markets are closed for Boxing Day, while European markets are light. US equity futures are tracking moderately lower, and commodities are mixed with oil slightly offered and gold mildly bid.
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