Rate hike fears rise in China following better GDP, pressuring stocks and boosting the USD

By IBTimes Staff Reporter | January 21 2010 6:49 AM

Faster than expected Q4 Chinese growth (10.7% y/y) has heightened fears that the PBOC may hike interest rates this quarter. This may not yet be a consensus view but the rise in tightening fears was sufficient to push most Asian (ex Japan) stock indices lower which led to a flurry of USD buying. The USD index has surged to a high of 78.90 this morning. EUR/USD made a brief attempt to pull back above the 1.4100 level in early London hours but has crashed down to a 1.4046 low with EUR weakness continuing to amplify the move. EUR/JPY has been choppy, but range driven allowing USD/JPY to trend higher. The weaker yen lent support to Japanese stocks.

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While stronger growth in China has been reflected in higher copper prices, the prices of many commodities have fallen on the back of the stronger USD. Gold is holding just a touch above the $1100 /ounce level having posted a low of $1104.96 this morning. The stronger USD was also a drag on AUD/USD in European hours. This followed overnight rally to AUD/USD0.9145 on the anticipation that Australian growth may find additional support from Chinese demand. The CAD and the NZD have also been under pressure despite better than expected retail sales data in NZ and rumours of Russian central bank interest in CAD.

The Greek Finance Minister Papaconstantinou this morning denied that the EU is preparing a loan to help Greece. While he again stated that Greece will be able to satisfy borrowing plans the focus in the market is switching to how practical this expectation is given the blowing out of bond yields and the addition pressures this implies for the deficit. While Greece remains the source of most pressure on the EUR, disappointing Eurozone composite PMI data this morning (Jan 53.6) provides further evidence that the pace of the recovery could be moderating. This will heighten the expectations that the ECB will be tightening policy later than the Fed.

Sterling has been subjected to a heavy round of profit-taking this morning. Cable has dived back towards the USD1.61600 area while EUR/GBP has bounced back towards 0.8700. The move was already in place ahead of this morning's round of UK data but the release of the much weaker than expected UK Dec M4 data (-1.1% m/m), will have sapped inflation fears further and helped restate the view that there is little risk that the BoE will bring forward a rate hike. UK public finances data were not as bad as expected. However, the borrowing requirement in the current fiscal year to date is still almost double that of last year suggesting the Chancellor has nothing to celebrate.

This afternoon US initial claims, Philly Fed and Leading indicators are due. Goldman results may be the highlight of US earnings today.

Jane FoleyResearch DirectorFOREX.comjfoley@forex.com+44 207 398 5024