CNY/USD Fundamental Outlook at 1500 GMT (EST + 0500)

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The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥90.60 level and was capped around the ¥91.30 level.  Bank of Japan Chief Economist Momma reported the pace of Japan's economic growth may slow temporarily because of decreasing public works spending...but overall, the Japanese economy is likely to continue to pick up.  Momma said the rate of deflation will ease in one to two years because the huge output gap has to be erased.  This week, finance minister Kan reported Bank of Japan can enact more measures to ease monetary policy and it is likely the government will increase pressure on the central bank to expand monetary policy further.  New finance minister Kan reported he plans to address the yuan at the Group of Seven meeting in February and indicated there are still various policy measures that could be taken by Bank of Japan to relax monetary conditions further.  The Nikkei 225 stock index gained 0.68% to close at ¥10,982.10.  U.S. dollar offers are cited around the ¥94.75 level.  The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥130.30 level and was capped around the ¥132.40 level.  The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥147.40 level while the Swiss franc moved lower vis-à-vis the yen and tested bids around the ¥88.20 level. In Chinese news, the U.S. dollar appreciated vis-à-vis the Chinese yuan as the greenback closed at CNY 6.8269 in the over-the-counter market, down from CNY 6.8272.  Data released in China overnight confirmed China's foreign reserves raced higher to a new record level in December, up 23% to US$ 2.4 trillion.  At the same time, banks provided CNY 379.8 billion in new loans, lifting the 2009 total to a record CNY 9.59 trillion.  This huge growth in loan demand evidences the risk of additional overheating in the Chinese economy and the pressure People's Bank of China faces to restrict additional monetary growth this year.  PBoC this week decided to lift reserve requirements at commercial banks by 50bps from 15.50% to 16.00%, effective from 18 January.  China Investment Corporation executive Peng moved the markets this week when he said I think the dollar is at its bottom now. There will be very limited space for the dollar to drop further.  The yen is what, I think, has the worst outlook. The yen will continue to drop, unlike the dollar, which will not serve for long as a source of funding carry trades.

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