The fundamental news overnight was all about China, as equity markets stumbled yesterday in Europe and the US ahead of the data, with the FTSE 100 in London ending the trading session with a bearish engulfing candle signalling a potential move lower today. The data for China was a mixed bag, with CPI coming in at 4.6%, slightly lower than the forecast 4.7%, whilst GDP came in at 9.8%, exceeding the forecast of 9.3%, with fixed asset investment yields falling just short at 24.5% against a 24.9% target, and finally industrial production flat at 13.5%.
All the above data simply confirmed that China’s economy expanded faster than expected at the end of 2010, and as a result worrying the markets further this morning, on the expectation of additional tightening over the next few months, with Chinese interest rates likely to rise further in due course. These figures also confirmed that China is now the second largest economy behind the US, pushing Japan into third place for the first time. It is interesting to note however, that the overnight data appears to have had little effect on the US dollar, which continues to remain waterlogged below the key 78.76 price level, having reacted little to the news, and indeed has continued to fall in the early London trading session, to currently trade at 78.58 on the dollar index chart. What is particularly interesting this morning is that we have risk off appetite in equities, and yet the dollar is also falling, suggesting a breakdown in the once traditional inverse correlation, with the US dollar once the ultimate paper based safe haven status. In addition, gold is also falling, which starts us wondering where the money flow if today – possibly to the Swiss Franc once again? Should this technical picture continue for the dollar, then we could see this fall to retest the 78.23 region once more, and if breached then a further fall to the 76.81 low of early November last year.
In early news elsewhere, the European PPI data came in higher at 0.7% against a forecast of 0.5% raising further concerns over inflation and helping the euro higher in early trading, adding the Jean Claude Trichet’s comments last week that inflation would be closely monitored, and interest rates increased without hesitation should the need arise. This has been counterbalanced by continued unrest in Europe with the euro-bond solution, as ministers continue to argue over the timescales for implementing any plan, but so far these negatives comments have not weighed on the euro, which has pushed back to retest, the 1.3468 region once again in early trading.
Longer term we expect to see the euro dollar pull back by the end of February to test the 1.23 to 1.27 region, before having a sharp rally for the remainder of the year where we could see it end 2011 in the 1.50 region or beyond as interest rates begin to take effect, but the low of last year at 1.1876 is likely to remain untested as part of the longer term 5 year cycle for the pair. As such we see a 6 week call option on the USD/EUR as an excellent trade for the next few weeks in anticipation of a pull back before the longer term recovery begins in earnest.
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