China's War of Words on the USD

- Summary of trade between 17:00 ET and 23:00 ET: The USD was trampled after Cheng Siwei, vice chairman of the Chinese People's Political and Consultative Conference, said that China should diversify its forex reserves into stronger currencies like the Euro. The official later clarified his statement, saying that he was only suggesting China buys stronger currencies, not necessarily Euros. He did not elaborate. Traders seem to have forgotten that Cheng made a similar comment at the start of April, when he said that China's USD reserves should be "reinvested abroad". Short-covering on speculative oil contracts, supply concerns and expectations of another draw in crude inventories pushed crude closer to $100/bbl, with the massive losses on the USD adding more momentum to crude's move higher. Gold benefited from the dropping USD and rising crude prices, with the commodity trading above a 28yr high. Asian equities generally traded higher, ignoring oil's march towards $100/bbl, but S&P futures drifted lower for most of the Asian morning.

- Forex: In the moments after Cheng's initial comments, the EUR/USD's rise gained momentum due to stop-loss buying, sending the pair all the way to 1.4665. After Cheng clarified his stance, EUR/USD pulled back to 1.4607, eventually settling around 1.4630. The CAD moved to a new record high against the USD, while USD/CHF dipped all the way down to 1.1350 as USD selling gained traction. Between 17:00 ET and 23:18 ET: USD index -0.54%, EUR/USD +0.50%, GBP/USD +0.30%, USD/JPY -0.47%, GBP/JPY -0.18%, NZD/USD +0.75%, USD/KRW -0.20%, CHF/JPY +0.13%

- As was widely expected, the Reserve Bank of Australia hiked interest rates and issued a hawkish accompanying statement. The central bank said that both measures of inflation are likely to be above their 3.0% target by the end of 1Q08, adding that there are few signs of growth easing. The central bank is not worried about the AUD's meteoric rise and its impact on Aussie exporters, saying that the rise in the exchange rate will help contain price pressure. The consensus seems to be that they will move again on interest rates during February, after the release of Q4 inflation figures, but markets currently see an outside chance of a December rate hike (Interest rate futures are pricing in about a 35% probability of another 25bps rate hike at the RBA's December meeting). Between 17:00 ET and 23:16 ET: AUD/USD +0.76%, AUD/JPY +0.29%, NZD/AUD little changed in a choppy session.

- Equities: At 22:55 ET Japan's Nikkei is -0.01%, Australia's ASX is +0.61% and South Korea's KOSPI is higher by more than 0.50%. Trading in Tokyo was quiet, with most investors waiting for Toyota's earnings to provide guidance. Some Japanese stocks traded higher on expectations of strong earnings, but these gains were offset by losses in shares of consumer finance and construction related companies. Hong Kong's Hang Seng index recovered some losses from recent sessions, with the index moving back above 30,000, despite profit-taking in shares of Alibaba.com during its second day of trading.

- Commodities: Crude oil rallied to a new intraday record high just below $98.00/bbl ahead of tomorrow's weekly inventories data, with analysts expecting a 1.6 million barrel drop in domestic crude supplies. Most of the decline is being blamed on an outage from Pemex, Mexico's national oil company. Nymex crude oil gained 1.25% between 18:00 ET and 23:07 ET, while spot gold gained +1.60%. Shanghai Copper is higher on supply concerns due to a labor strike in Peru.

(by Eben Esterhuizen and Gavin Pierce)