NEWS / Foreign Exchange

FX Stabilize as Yen Retreats, Chinese Hike Seen Next Week

Reports that the US Embassy in Germany is advising US nationals to boost vilgilance are having no impact on currencies.

The dollar stabilizes in quiet European Friday trade after preventing the euro from revisiting its all time high of 1.3676 but nearly a third of a cent (reached 1.3636). The yen remains well off the highs of later NY Thursday trade on improved risk appetite after US stocks were successfully insulated from yesterday??™s China-driven global equity sell-off. One of the reasons markets are able to weather Thursday??™s drop in Chinese equities was the lack of any remarks by Chinese authorities directed at the markets--such as mulling raising taxes on capital gains as was the case on February 27. The rise in the US leading indicators index coupled with continued remarks from Europe shrugging the strength of the euro also boosted risk appetite and carry trades. The Philly Fed survey was evidently disappointing, but its 12 pm release helped avoid any notable market impact.

Now that China??™s inflation rate has climbed to 3.3%, exceeding 1-year deposit rates of 2.79%, we expect expect the People??™s Bank of China to raise interest rates next week, with April 27th being the most likely date as interest rate hike are always done on a Friday with the exception of the last rate hike done on a Sunday (March 19)  in  order not to spook markets after the February 27 market plunge). Last month??™s rate hike of 27 bps in the 1-year lending and deposit rates to 6.39% and 2.79% respectively, was the third increase in borrowing costs in 11 months and the fourth rate increase since the central bank began its tightening cycle on October 2004. Since then, lending rates have been lifted by 108 bps to 6.39%, while deposit rates have been pushed up by 81 bps to 2.79%. Persistent increases in inflation and escalation in property, steel and energy demand should produce at least 2 rate hikes of 27 bps.

This will further quell expectations of a one-off revaluation in the yuan, which has already strengthened 5.0%, excluding the 2.1% revaluation vs. the dollar 2 years ago. With further tightening to come, we expect the yuan to appreciate by another 1.5% to 7.62 by year-end from the current 7.73 exchange rate.

The main data releases are Canada retail sales (8:30 am EST). see below fore more.

USDJPY rebound seen capped at 118.80, eyeing 118.20s

USDJPY made a convincing rebound off its 117.60 lows despite 1 0.9% increase in the February All- industry activity index beating expectations of a 0.3% decline and the previous 0.2% decrease. We expect the pair to show a weak bias in the US session, dragging towards the 118.20 support, where buying interest is seen stabilizing the pair well above the 118 figure. Upside seen capped at 118.90.

Euro seen slipping towards 1.3580s despite EU??™s comments

Comments from EU officials signaling their approval of strengthening euro and remarks from Germany ??™s export associations signaling their OK with a 1.36-1.40 euro level reflects the strength of fundamentals in the pair.  Although we expect today??™s technicals to drag the pair towards the 1.3580s, the pair remains well supported at the 1.3560, for a renewed rally into next week. We may, however, hear comments from individual politicians referring to the quick pace of recent strengthening, but the pair should be expected to maintain composure ahead of next week??™s array of US data. Upside capped at 1.3640, followed by 1.3680.

USDCAD awaits retail sales

USDCAD awaits the 8.30 am release of February retail sales expected to have dropped 0.3% following a 0.2% decline, while core sales (ex autos) are seen up 0.3% after 0.3%, which could maintain negative  pressure. Technicals show continued declines towards the 1.1260s, but the data merit attention. Upside capped at 1.13 figure, followed by at 1.1330. In the event that sales show a decline of less than 0.2%, USDCAD could extend fresh declines towards the 1.1260 target. Key support stands at 1.1230.