On Wednesday China Was in the Spotlight

October 24, 2013

The US dollar rose on Wednesday to the pound and commodity currencies and almost didn’t change to the euro and weakened Vs the yen and Swiss franc. Risk inclination fell on Wednesday amid the reports about interest rates sharp increase in China and rising bad loans write-offs by Chinese banks – which aroused the growth of yen and franc and the decrease of risk-sensitive AUD and NZD. Canadian dollar dropped after a mild BOC Rate Statement in which it refused its inclination to raising interest rate.

On Wednesday compared with the prior day China was in the spotlight. Rates growth at the local interbank market turned out the highest since July and it was recorded as the People's Bank of China didn’t start injecting funds into the market on Wednesday. Seven day Repo Rate in China which indicates the availability of funds in the bank system rocketed by 42 basis points – to 4%. The central bank of China is concerned about too fast growth of real estate prices in the country. Chinese banks also have problems. Five largest banks of China increased loan write-offs by 2.9 times in the first half of 2013 to 22.1 billion yuan ($3.65 billion) in comparison with 7.65 billion yuan last year.

Worsened liquidity situation which is the main growth driver of risk assets led to risk inclination decrease, stock markets fall and the growth of yen, franc and dollar. Japanese Nikkei fell by 2% and finished the session with a significant fall since October 2. The yen rose to its high for two weeks. New Zealand dollar dropped at the fastest rate for two months, Australian currency also weakened. Though at first AUD rose on Wednesday amid the news about higher than expected inflation rate in the third quarter. Consumer Price Index rose by 1.2% Vs prior quarter while a growth only by 0.8% was expected.  

 

Canadian dollar fell to almost 2-week low Vs the dollar after BOC Rate Statement in which it refused an inclination to interest rate increase and lowered its forecast on GDP growth for the nearest several months. The Bank of Canada left its interest rate unchanged but marked economic slowdown. Bank of Canada governor Poloz said that more negative data would make them think again about the probability of rate decrease.

The euro almost hadn’t changed by the end of the day. Germany's economics ministry raised its economic growth projection for 2014 to 1.7% from 1.6% referring to a high employment rate, strong home economy and investment growth. Euro-Zone Flash Consumer Confidence grew from -14.9 in September to -14.5 in October. The index has been at the highest level since July, 2011 for two months in a row. According to the monthly statement of the Bank of Spain economic growth has been recorded for the first time since 2-year recession. In the third quarter of 2013 Spanish GDP grew by 0.1% compared with the second quarter when its fall by 0.1% was recorded.

The Bank of England Meeting Minutes published on Wednesday showed that the central bank could start raising interest rates earlier than expected – after Monetary Policy Committee had admitted that unemployment rate in the UK would fall in the second half of the year faster than assumed. The economy will also grow in the second half of the year faster than expected. The data indicate a stable economic recovery of the UK. After the publication of meeting minutes the expectations that the UK central bank could raise interest rates much earlier than in 2016, strengthened.

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