MORNING BRIEFING:  China’s surprise rate hike leaves a significant impact

What’s new:
China: Raises its one-year benchmark for lending and deposits
US Dollar: Finds support on Chinese rate hike, but support eases slightly this morning
Germany: Better than expected Zew Survey
Canada: BoC keeps rates on hold, revises growth outlook downwards, and surprises with softer inflation

Today:



Rates in Asia and Indices:
EURUSD: 1.3801 - 1.3698.
USDCHF: 0.9719 – 0.9661.
GBPUSD: 1.5746- 1.5649.
EURJPY: 112.22 – 111.56.
USDJPY: 81.67 – 81.23.
DowJones: 10’978.62 -1.48%
NASDAQ:  2’436.95 -1.76%
S & P 500: 1’165.90 -1.59%
Nikkei: 9’381.6 -1.65%
Shanghai: 3’003.74 +0.06%
Gold: $ 1'339.0    
Crude Oil: $ 80.04

Comments:

The Chinese surprise policy hike yesterday dominated the markets.

In an effort to calm some of the heat from the economy, on Tuesday, China’s central bank announced it would be raising its benchmark one-year lending and deposit rates by 25 basis points effective 20th October.

The move had a significant impact on the markets, and it helped support for the US Dollar. Investors are speculating that the US and China have reached some agreement, and which could lead the US to take a more gradualist approach to QE.  Also pointing towards a possible US-China deal is the United State’s recent decision to delay an international economic and exchange rate policies report to Congress.

EUR/USD dived as low as 1.3713 yesterday and has registered lows of 1.3698 today, during Asian trading. However USD support eased a bit with the Euro recovering some of its losses.

The Euro seemed immune to a better than expected German Zew survey yesterday, as the limelight was set on the QE issues.

The Chinese rate hike could be opening the door to more tightening, which could imply a reduction in Chinese and global growth and could also affect China’s huge demand for commodities.

The BoC as was widely expected kept its policy rate on hold and revised downwards its growth outlook for 2010 and 2011. The BoC however surprised with comments that inflation was softer than expected.

Good day,

Rudolf Muscat
Trading desk

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