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The US Dollar and the Japanese Yen stand to gain after China announced a plan to raise bank reserve requirements to 12%, trimming lending and weighing on risk appetite. The economic calendar is uneventful in European hours, with currency markets likely to look to stock and commodity markets to set the tone for directional momentum.

Key Overnight Developments

• New Zealand Credit Card Spending Contracts for Ninth Month
• Risky Assets Retreat as China Promises to Tighten Reserve Requirements


Critical Levels

08-21-09

The Euro kept to familiar territory in overnight trading, oscillating above the 1.42 level. The British Pound traded lower, slipping below the 1.65 level once again to test as low as 1.6436.


Asia Session Highlights

New Zealand Credit Card Spending declined for the ninth consecutive month on a year-over-year basis in July, by 2.0%. This occurred as the combined debit and credit card spending figure rose 0.8%. The combination of the two pieces of data might lead one to suggest that debit card spending dominated over purchases made with credit. Such an environment would be yield-negative. A drop in the demand for borrowed funds would create incentives for banks and other lenders to drop the interest rate they charge to their customers in an effort to attract business. As such, the New Zealand Dollar could be hurt in the medium run as foreigners find that the country continues to diminish their own yield advantage over others. On balance, the decline does not necessarily indicate that New Zealanders have forfeited their shopping habits. A deeper look into the data shows that the use of credit cards abroad, by domestic residents, rose 4.5%. Tourism spending, however, may be cyclical and might not necessarily indicate that next month's figure will rise.

Risky assets retreated, boosting the safety-linked Japanese Yen and US Dollar as China Banking Regulatory Commission said it was drafting a rule change that raise reserve requirements for Chinese banks to 12%, pushing firms to rein in lending. Policymakers rushed to boost lending access at the height of the credit crunch but are now concerned that these measures may be overshooting to create a speculative bubble. The Hong Kong Stock Index promptly retreated on the announcement and other exchanges may be soon to follow considering the market's recent focus on China as the poster-child of recovery from the global downturn, promising further gains for the Japanese unit and the greenback.

Euro Session: What to Expect

The economic calendar is decidedly bare in European hours, with Augusts' Euro Zone Purchasing Manager Index the only notable item on the docket. Expectations call for a rise to 48.0 from 47.0 in the previous month, showing that the service and manufacturing sectors will shrink again this month, albeit at a slower pace. Indeed, the pace of contraction has steadily moderated since the index hit a record low at 36.2 in February as ample global stimulus measures as well as a widespread move to restock depleted inventories helped slow the bleeding. Both of these catalysts are inherently temporary, however, and PMI readings are likely to reverse course lower in the months ahead as the weight of rising unemployment holds back a sustainable rebound rooted in private demand.

On balance, scheduled event risk does not present meaningful market-moving potential, with currency markets likely to look to stock and commodity markets to set the tone for risk sentiment and shape directional momentum.

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