Retreats of commodity prices accelerate in European session as USD gains ground against major currencies. The front-month contract for crude oil slides to -1.4% 80.75. Speculations on appreciation in RMB depressed stock markets and hence affected oil prices. The American Petroleum Institute is due to report its inventory estimates. Investors take profits of recent gains ahead of the report.
Widening in interest-rate differential between China and US bonds increases pressure for RMB's appreciation. Data shows that the spread between 1-year China and US bond yields surged to 1.43% from 1% in May 2009. The difference has attracted strong investment inflows amid speculations that USD-pegged RMB should rise. While Yi Gang, the State Administration of Foreign said the government will endeavor to keep exchange rate at a 'reasonable and balanced level', gradual appreciation seems inevitable.
Over the weekend, the PBOC Governor Zhou Xiaochuan said China will exit measures implemented last year for combating the economic crisis 'sooner or later'. This spurred worries that Chinese economic growth will be dampened.
Stock market performance is mixed today. In Asia, the MSCI Asia Pacific Index added +0.2%. Hong Kong and China indices rose modestly while Japan's Nikkei 225 Stock Average slid -0.2% to 10567.7 as Japanese yen surged. In Europe, major stock indices fall, by around -0.5%, as investors take profits and prefer to see how the macro-economic development evolves.
Gold extends weakness for a second day. The metal falls to 1117 as the Chinese government stated it's unlikely for gold to be the country's main reserve currency. According to Yi Gang, despite lucrative return from owning gold in recent years, long-term return (say 30 years) is not attractive and price movement is rather volatile. The comment has disappointed many gold bulls as one of the main reasons for gold rally is central bank buying. In mid-November and early December, the yellow metal rocketed and made record high as several Asian central banks quickly absorbed IMF's gold sales. This spurred speculations of central bank demand.
Strength in USD is also weighing on commodities. The greenback rebounds against major currencies including the euro, the pound and Australian dollar. EURUSD slips further to 1.3669 after erasing all gains made earlier on Monday as Greek Prime Minister Papandreou warned that 'if the European crisis metastasizes, it could create a new global financial crises with implications as grave as the U.S.-originated crisis two years ago'.
Pound also plunges after house price data in February turns out to be worse than expected. The RICS house price balance eased to 17% from 31% in January. The market had anticipated an improvement to 34%.