Daily Report: Dollar Mildly Lower as China Easing Lifts Sentiments

Dollar is broadly lower as the week started with strong risk appetite as lifted by China's easing measure. Though, the loss is so far limited with EUR/USD held below 1.3321 resistance, GBP/USD below 1.5928 resistance and USD/CHF above 0.9098 support. AUD/USD is also held below recent high of 1.0844 even though USD/CAD breached 0.9926 support as crude oil extends recent rally. Trading is subdued ahead of US holiday today as well as meeting between Eurozone finance ministers' meeting on Greece in Brussels.

PBoC cut bank reserve ratio by 50bps effective February 24, that is, from 21% to 20.5%. That's the second cut in two months after PBoC pushed the RRR to record 21.5% last June when CPI reached a three year high of 5.5% in May. CPI unexpectedly jumped to 4.5% yoy in January. But China seemed to be more worried by slowing global as well as domestic demand, which was reflected in the poor January trade data. The RR cut is seen as positive to the risk markets, by releasing as much as CNY 400b of liquidity, more than USD 60b. Economists are expecting China to continue to use reserve ratio as the primary monetary tool, and interest rate as secondary. A minimum of two 50bps RRR cut is anticipated by the markets this year and there could be three or more.

EU finance ministers will meet in Brussels today with Greek prime minister Papademos on the EUR 130b second bailout for the country. A news reports unveiled that German Finance Minister Wolfgang Schaeuble remained doubtful about the ability of Greece to carry through the agreed austerity program. Yet, the market remained confident that an agreement will be reached. And hopefully, the details of private sector involvement and ECB's role would be confirmed today.

Japanese Finance Minister Jun Azumi said its country, together with China, will respond to any funding request from the IMF which is seeking to raise as much as US$ 600B to help resolve the sovereign debt crisis in the Eurozone. Yet, both countries stated that “European countries need to do more”. This is a boost to the market sentiment after Chinese Premier Wen Jiabao and PBOC Governor Zhou Xiaochuan pledged last week that China would increase investment in the Eurozone.

USD/CAD Daily Outlook

Daily Pivots: (S1) 0.9939; (P) 0.9962; (R1) 0.9982; More...

USD/CAD dips to as low as 0.9913 today and the break of 0.9926 support confirmed resumption of the fall from 1.0522. Intraday bias is back on the downside for 0.9891 support next. Break there will also resume fall from 1.0656 towards 100% projection of 1.0656 to 0.9891 from 1.0522 at 0.9757. On the upside, break of 1.0050 resistance is needed to signal short term bottoming. Otherwise, near term outlook will remain bearish even in case of recovery.

In the bigger picture, a medium term bottom is in place at 0.9406 and price actions from there could either be consolidation to fall from 1.3063 or the third leg of the whole consolidation pattern from 2007 low of 0.9056. We're favoring neither case for the moment. Firstly, we'd expect 0.9406 to hold for a while at least. Secondly, the eventual pattern of the price actions from 1.0656 would decide whether rebound from 0.9406 is going to extend higher, or USD/CAD is just gyrating in range. We'll stay neutral first until the pattern from 1.0656 finishes.

Economic Indicators Update

Subscribe to our daily and mid-day newsletter to get this report delivered to your mail box