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.
This was well above People’s Bank of China (PBOC) target of 4%.
In last week’s article, I had forecasted an optimistic figure of 5.2% for China’s CPI; but the actual figure of 5.4% beat out even my most bullish estimates.
Additionally, the PBOC announced last week that its foreign exchange holdings, already the world’s biggest, increased by USD 197 billion in the first quarter to USD 3.05 trillion.
This is 3 times more than the world’s second-place country, Japan.
Interestingly, in the last 10 years alone, China’s enormous trade surpluses and its continuous buying of US dollars to suppress the Yuan’s value have led the reserves to balloon 17-fold.
For every US dollar that China buys, China prints about 6.5 Yuan, adding even more cash to its economy, thereby stoking inflation. To neutralise this cash, China conducts “sterilisation procedures” like raising reserve ratios and limiting banks’ lending.
Hence, by locking up excess liquidity in the financial system, the Chinese government can help to tame inflation by controlling the money supply.
Since the global financial crisis, China has raised its reserve ratio 10 times and hiked interest-rates 4 times. This is a stark comparison to other central banks like the Fed and the ECB, and further highlights China’s role in leading the global economic recovery.
Top News This Week
USD Existing Home Sales. Wednesday, 20 April 2011, 10pm.
I expect figures to come in at 5.04 million (previous figures were 4.88 million).
Australia PPI. Thursday, 21 April 2011, 9.30am.
I expect figures to come in at 1% (previous figures were 0.1%).
Trade Call
Buy NZD/USD at 0.7865
On the hourly chart, NZD/USD has been on a nice uptrend for 2 weeks. With Australia due to report good numbers this week, I expect the spillover effect to push NZD/USD up as well.
We will go long once prices bounce on the uptrend, and dip to 0.7865. Stop loss is placed 50 pips below the entry price. Since we are playing the trend, we will have 2 profit targets on this trade. Our first unit will exit at 0.7915 and the other will exit at 0.7965.
Entry Price = 0.7865
Stop Loss = 0.7815
1st Target = 0.7915
2nd Target = 0.7965
Bro, will aussie going up with this news about China?
Hi Rahim,
Most definitely. If you look at the pattern on the last few hikes on reserve ratios, the risk currencies experienced a mild pullback (because of the threat of inflation), and then resumed upwards when investors get the feeling that China is roaring ahead. Same case will prevail here.
Hi Mario,
Would you be able to elaborate further on why buying of the Usd by China depresses it’s ccy??
Hi Ben,
Sure. It starts with this: when you buy something, you need to pay for it.
So when China buys US Treasuries, they use the Yuan to pay for it. Buying large amounts of US Treasuries simply means they need an even larger amount of Yuan to pay for it.
Economics 101: oversupply of any goods leads to a decrease in price. Same thing – oversupply of Yuan leads to the drop in its value.
Thanks Mario.
Very insightful.
Hi Ben,
You’re welcome. Look out for this week’s edition! Should be out tomorrow (Tuesday).
TP1 hit! woohoo! =)
You mean TP2 also bro?
hahahahhaa….
haha. yeah! TP2 too! Nice trade call. Cheers =)
Hi Mario,
You did it again and thanks i made some pips. i will follow your trade call and save enough for your course.
Thank you.
Hi Veronica,
Thanks! Glad you made some money! Sure, see you in the course!
thanx Mario. like veronica I am following you to earn enough for the course. do you currently have any signals service?
Hi Dil,
You’re welcome.
We will be launching the signal service soon. Will keep all blog subscribers posted soon. In the meantime, enjoy the articles and please help me to spread the word on the blog! Thanks!