Any hope that markets could go into this weekend’s Chinese New Year celebrations, the start of Carnival and the Bank Holidays in both Canada and the US were shattered this morning following further monetary tightening from China.  This has resulted in traders and investors bailing out of commodities and rushing back into the safe haven arms of the US dollar.  The reason is that Chinese banks will now be required to raise the amount they keep on reserve as the authorities attempt to rein in rampant lending in an effort to cool the fastest growing major economy after loan growth accelerated and property prices soared.  As from 25th February the reserve requirement has been increased by 50 basis points to 16.5% for larger banks & 14.5% for the smaller ones.

Naturally the euro was once again in the firing line as the common currency was also hit with a string of worse than expected eurozone fundamental news (see my euro vs dollar post).  Meanwhile, in the US the markets are having to deal with the UoM (University of Michigan) consumer sentiment which has come in slightly below expectation at 73.7 against a forecast of 74.8, although core retail and retail sales both exceeded expectation at 0.6% and 0.5% respectively.  However, trading volumes may be thin on Wall Street ahead of the Presidents’ Day holiday on Monday, all adding to heightened market volatility which in the past few days has seen both equities and currencies over react to every rumour and statement relating to the outcome of Thursday’s EU summit as traders continue to fret at the lack of any concrete proposals to Greece’s debt problems.  Indeed, whilst the debt of the other Club Med countries had appeared to stabilize with a consequent return of an increased appetite for risk the Chinese announcement has seen the yields on the Greek 10 year note rise by 17 basis points to 6.17%.  However, this is still nearly 1% lower than the peak hit two weeks ago and even the spread with German bunds which breached 400 basis points at the end of January has narrowed to 296 basis points.   Meanwhile CDS (credit default swaps – ie a form of debt insurance) for Portugal, Spain and Italy have all moved higher.

The yield on US 10 year Treasuries saw haven buying, dipping 2 basis points to 3.70% following a four week overnight high following a poorly received auction of $16bn 30 year bonds.

As usual the risk on risk off market turmoil has been reflected in the currency markets where the euro has been under the cosh (although at the time writing it is starting to rally somewhat) and could even be hammering out a bottom at the USD1.3630 level leading to a possible rise next week – but with thin trading volumes owing to the various holidays we can expect volatile and random price action.  EURJPY paints a similar picture and also looks to be hammering out a bottom at 122.70.  Cable continues to trade sideways, as it remains bearish and fails to breach the 9 day moving average, although here too we could see a small rally next week.  Aussie dollar has stalled following previous two days of gains but seems to be holding above the short term moving averages and a break above the 40 day may lead to an attack on the 0.9250 price handle in due course.  As discussed in today’s oil market commentary the picture for oil looks fragile and bearish while gold continues to trade in a narrow range.

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Good luck with your trading and have a great weekend.

Equity markets in Asia overnight all rallied, ending in positive territory with the Nikkei bouncing back from a two month low.  This more upbeat mood was taken up today by European exchanges which saw the FTSE 100, German DAX & French CAC all gaining as details have been emerging on how the EU propose to bail out Greece.  The latest news is that Germany and other Eurozone partners may be prepared to lend to Greece or buy its sovereign bonds should the need arise. However, it is unclear whether this would be formally agreed at tomorrow’s summit.  The response in the currency markets saw the dollar fall against the euro and rise against the Japanese Yen.  The USDJPY tends to be positively correlated to investors’ appetite for riskier assets, with the Yen tending to lose more often when investors snap up stocks and commodities.   With Japan’s interest rates among the lowest of the major countries, and expected to remain so for some time, traders borrow cheaply in yen to invest in higher yielding assets, making money on the difference in the so called carry trade.

Further evidence of this positive mood could be seen in the dollar index (DXY) which suffered its biggest fall since November although it has managed to recoup some these losses in today’s trading.

With precious little fundamental news markets & main stream news media have continued to focus on sovereign debt – Greece primarily but are now starting to include other countries:  Spain, Turkey, UK, Portugal, Ireland & Dubai – which rather crually have been designated the STUPID ones, with tomorrow’s meeting in Brussels now being seen as crucial.  Elsewhere sterling too has been taking a bit of battering on the back poor retail sales on Tuesday and comments today that the BOE could restart its bond buying programme (ie QE) if the economy requires further stimulus.  This raises the possibility of a double dip recession & W shaped recovery.

Meanwhile the Aussie Dollar was sharply higher, along with most commodities, boosted by the news that measures were being taken to deal with the Greek debt problems.

While European equities have been responding favourably today Wall Street has not been quite so positive with the DOW just managing to hold over 10000 as it too waits for a resolution to the Greek debt crisis.  Trading volumes have been very low and the index did fall during the Ben Bernanke testimony to the House financial services committee where he said that the Federal Reserve was discussing whether to communicate its policy stance through the interest rate it pays banks to store money at the Fed, as it begins to consider tightening credit in the wake of the recession.  Given that the Fed’s programme is scheduled to end next month the question traders and investors need an answer to is who is going to start picking all that US debt – perhaps STUPID should be STUUPID – Spain, Turkey, UK, USA, Portugal, Italy & Dubai.  The clue is below.

Good luck & good trading.

What is one of the best retail forex trading platforms?  In my view it is Metatrader 4.  Advanced, powerful & intuitive it now comes with ECN execution, so you can happily scalp away without broker or dealer intervention.  Just download your free demo copy of MT4 by following this link – download metatrader free -  and get started today.  Don’t forget to follow my daily posts for updates and analysis of the forex markets to help you with your forex trading – so good luck and good trading.

Market News :

China moving away from risky assets & into Treasuries

Portugal Bond Sale

Fed’s Exit Strategy