Asia Market Update - Markets shrug off Chinese rate hike, waiting for U.S. subprime developments

- China's central bank hikes interest rates by 27bps: Asian equity markets, especially China, have been concerned for some time about additional firming from Chinese authorities. The move was widely expected, and seems to have been well priced in by markets (the Shanghai Composite Index managed to stage a strong rebound after nervous selling at the open). The consensus is that the latest rate rise is unlikely to dent Australian exports, dominated by commodity inputs that remain essential to sustain China's still rapidly growing economy. (This is confirmed by BHP trading up almost 1.7%). After the rate hike, the PBoC governor Zhou said that he is not worried about current inflation levels, adding that further efforts to slow export growth will hurt the Chinese economy.

- Forex: Forex markets remained focus on risk, with equity markets continuing to provide direction. After the EUR/USD broke through key resistance levels at the end of last week, this week's direction is likely to be determined by developments in the U.S. subprime market. In its previous statement, the Fed noted "tentative signs of stabilization" in the U.S. housing market. Given the recent subprime woes, traders believe the Fed may need to alter its outlook. A change in the Fed's housing outlook could cause significant volatility in forex markets, with the effects amplified by a thin schedule of economic data for the upcoming week.

- Japanese Tankan survey expected to disappoint: A major news agency survey predicts that Japanese manufacturers business sentiment dropped to a one-year low in March (BoJ's previous tankan survey in December put manufacturers sentiment at a two-year high). However, non-manufacturers (eg. retailers) are now more optimistic, hinting that domestic consumption is holding firm in the first quarter of 2007.

- Asian Equities: The Nikkei 225 is higher by more than 0.75%, despite Friday's losses on U.S. equities and the Chinese rate hike over the weekend. Japanese technology and exporters shares climbed on the weaker yen. Japanese banking shares are lower for the 5th consecutive session as the BoJ is widely expected to leave rates unchanged at its upcoming meeting. The Kospi index is tracking gains in the Nikkei, with the index being buoyed by gains in ship-builders. The ASX 200 index is higher by more than 0.40% driven by gains in shares of miner BHP and Bendigo Bank. Once again, Aussie companies that have exposure to the U.S. housing market, such as Rinker, declined sharply. Chinese Equities opened lower by more than 2% after the People's Bank of China decided to hike rates by 27bps. However, Chinese shares have since rebounded off of sessions lows and into positive territory as the rate hike may have already been priced in by traders. Shares on the Hang Seng are currently higher by more than 0.20%, driven by gains in China Mobile and property developer Hang Lung Properties.

- The Taiwan dollar becomes the new carry trade target: Despite the PBoC rate hike boosting other Asian currencies, the Taiwan dollar traded lower as traders started viewing the currency as the new carry trade funding currency of choice. Analysts expect the attraction of the Taiwan dollar for funding carry trades to increase, especially as there's more volatility elsewhere. In addition, the Taiwanese government also wants a weaker currency to help exports (the Central Bank said it may intervene in currency market in order to maintain order)

- Commodities: Crude oil is higher on bargain hunting after falling below the $57 level (6-week low). Barring some very bearish economic data from the U.S., analysts expect oil prices to recover in the coming weeks ahead of the U.S. driving season. Spot gold is higher by more than 0.25%, tracking the gains in crude oil and equities. Shanghai Copper is lower after the PBoC rate hike.

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