Renewed Chinese tightening keeps risk appetite at bay

FX Update: Renewed Chinese tightening keeps risk appetite at bay

Chinese banks restricing lending
More news out of China overnight on the effort to crack down on too-loose credit spoiled risk appetite further. Major Chinese banks indicated that they are responding rapidly to last week's demands from Beijing that they must restrict lending and raise reserves. Bank of China apparently will stop making new corporate loans outright, save for loans to companies that have repaid earlier loans, according to a source quoted in a Bloomberg article. This news pressured risk appetite in Asia, and Chinese stocks wilted to the lowest close since late October. (Interesting side note: the Shanghai Composite grazed the 200-day moving average today, a moving average it last crossed above in March of last year.

JPY
The JPY gained further support as the China bank moves further bolstered risk appetite and saw a renewed rally in bonds, pushing USDJPY back below 90.00 again, and EURJPY to almost nine-month lows. EURJPY has seen a remarkable 800-pip run to the downside over just the course of . This is a reflection of how quickly risk appetite has soured and bonds have rallied after initial signs of risk appetite kicked off the New Year. The JPY was also stronger as the Bank of Japan failed to announce any fresh QE initiatives aimed at increasing liquidity and fighting deflation on the heels of its interest rate setting meeting overnight. The news item that S&P might cut Japan's credit rating somehow manage to sail under the radar - but we'll tuck this item into our cap for the longer term bullish view on USDJPY. Accumulation at these levels looks attractive.

Pound
In Europe, the pessimists seemed to be in charge, as another ugly UK GDP reading (showing barely positive +0.1% QoQ growth vs the more robusts +0.4% expected) saw GBP consolidating sharply to the downside after trying to make a run at new highs vs. the Euro. This fundamental news could put up a significant hurdle for GBP to overcome in the short term here. The Bank of England's Mervyn King was out today discussing further reform of the banking industry in the UK, perhaps adding to the negative sentiment on the pound. King indicated that, while now is not the time to raise capital requirements, the structure of banks needs to look "very different" and that bank creditors need to know that they won't be bailed out. He also state that the liability structure of . Mr. King's speech was mostly philosophical and lacked any description of concrete new initiatives, but it is clear that a serious reform of the financial services sector lies in store for the UK.

Euro
The German IFO came out with the 10th consecutive increase in January, an impressive performance considering many of the negative factors weighing on the Euro of late, especially the situation in Greece. These factors are apparently not affecting business sentiment on the ground in Germany just yet.The IFO normally does a reasonable job of leading the equity market, however, and changing sentiment may not have had time to show up in the survey considering the recency of the risk sell-off. If risk appetite continues to look shaky next month, the IFO will come in far lower this time around.  In other Euro news, Greece managed to sell EUR 8 billion of bonds today at a yield of 6.2%

Chart: EURGBP
EURGBP trying to make a convincing reversal today after the lousy UK growth data and the BoE's recent insistence that one should "look through" high near term inflation numbers. Meanwhile, the Euro might find some support here as the situation in Greece has seen a successful bond auction and the Greek government out with the announcement of unprecedented austerity measures. This could feed a larger move back into the old range in EURGBP, with recent lows as the structural support for that view.

Looking ahead
It's confidence day in the US, with January monthly Conference Board confidence out shortly and then the weekly ABC confidence number out after the US close. We need to see a sharp improvement in the weekly numbers if we are to believe that things are not going in the wrong direction again in the US already. Remember that tomorrow we have an FOMC meeting, even if it is one in which Bernanke may attempt to keep a low profile.

Economic Data Highlights

• Japan Dec. Corporate Service Prices fell -1.5% YoY as expected and vs. -2.2% in Nov.
• New Zealand Dec. Credit Cart Spending rose 1.8% YoY vs. 1.5% in Nov.
• Japan Bank of Japan left rates unchanged at 0.10% as expected
• Japan Jan. Small Business Confidence rose to 41.3 vs. 40.4 expected
• Germany Dec. Import Price Index rose +0.5% MoM and fell-1.0% YoY vs. 0.0/-1.5% expected, respectively
• Switzerland Dec. UBS Consumption Indicator fell to 1.195 vs. 1.255 in Nov.
• Germany Jan. IFO rose to 95.8 vs. 95.1 expected and 94.6 in Dec.
• UK Q4 GDP rose +0.1% QoQ and fell -3.2% YoY vs. +0.4/-3.0% expected, respectively, and vs. -5.1% YoY in Q3.
• UK Dec. BBA Loans for house purchases rose to 45,897 vs. 45,750 expected and 44,965 in Nov.

Upcoming Economic Calendar Highlights

• US Nov. S&P/CaseShiller Home Price Index (1400)
• US Jan. Consumer Confidence (1500)
• US Nov. House Price Index (1500)
• US Jan. Richmond Fed Index (1500)
• US Weekly API Crude Oil and Product Inventories (2130)
• US Weekly ABC Consumer Confidence (2200)
• Japan Dec. Merchandise Trade Balance (2350)
• Australia Q4 Consumer Prices (0030)
• Japan Bank of Japan Monthly Report (0500)