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(As featured on My Paper on 26 April 2011. Click here to enlarge)
The US dollar was badly assaulted last week because of the warning given by Standard & Poor’s on the state of US debt.
The S&P cut the outlook for US sovereign debt from stable to negative, which was the first time it had done so.
Prior to the announcement, Moody’s was the only other rating agency that had ever put the US on downgrade watch. This happened in 1996 when the Republicans refused to vote to increase the debt ceiling.
China has announced that reserve ratios will rise half a point from 21 April 2011; bringing the requirement to a staggering 20.5% for the nation’s biggest lenders.
Central bank Governor Zhou Xiaochuan said that he sees “no absolute limit” on how high the reserve requirements can go; adding that monetary tightening will continue for “some time.”
The move came less than two weeks after an interest-rate increase, which took key one-year borrowing costs to 6.31% and the deposit rate to 3.25%.
The main reason for the move was due to China’s stubbornly high inflation figures. On Friday, it was reported that China’s Consumer Price Index (CPI) for March was at 5.4%, mostly attributed to higher food costs.
(As featured on My Paper on 12 April 2011. Click here to enlarge)
The European Central Bank (ECB) made its move laste last week, hiking interest rates 25 basis points from 1% to 1.25%.
Although the rate hike was the first in almost three years, it was widely anticipated by traders. They welcomed the news, and sent the euro higher against the United States dollar, blasting over 200 pips to hit 1.4483 yesterday morning.
Another favoured risk currency, the AUD/USD, moved in similar fashion, surging past 1.05 for the first time.
The rate hike by the ECB widened the differential between US and European yields, and based upon Euribor futures, the market is looking for at least another 50 basis points of tightening from the ECB before year-end.
The Euro bulls seemed to throw caution to the wind, despite sovereign-debt problems lurking in the background. Portugal has officially requested aid from the IMF, and the bailout program will be in the region of 80 billion euros (S$145 billion).
(As featured on My Paper on 5 April 2011. Click here to enlarge)
The United States non-farm payrolls report last Friday spurred a risk rally in the Forex market because the figures painted a better picture than expected.
The forecast was for 191,000 jobs, but the numbers came in at 216000 instead, higher than my own estimate of 203,000 in last week’s article.
As an additional boost, the unemployment rate fell to the lowest level in two years, at 8.8 per cent. It has fallen a full percentage point (from 9.8 per cent) in as little as four months.