Asian Markets Dragged Down By China, Dollar Extends Rally

Asian markets are dragged down by worries over China as the week opened. Nikkei dropped -167 pts, or -1.26% to close at 13062 while HK HSI was sharply lower by dropping for the -2% at the time of writing. In China, the 7-day repo rate on Friday soared to the highest since at least 2003, suggesting tightening of interbank funding. Xinhua news stated that the sharp increase in interest rates was driven by "market distortions caused by widespread speculative trading and shadow financing". It affirmed that liquidity in China's financial sector remains ample. However, markets are clearly concerned with financial stability in China. After the second quarterly meeting, the PBoC announced that the central bank would "appropriately fine tune its monetary policy". It's the first time since September that the PBoC has used the "fine-tune" phrase, signaling the monetary policy outlook would be more accommodative.

In the currency markets, the dollar extends the post FOMC rally this week and edged higher against European majors. The USD/JPY and USD/CAD are the two strongest pairs so far. In particular, last week's rise in the USD/CAD, which took out an important resistance level at 1.0445, suggests more medium term strength back to 1.0656 resistance next. The AUD/USD is holding above last week's low for the moment, despite negative news from China. We anticipate further fall ahead to 0.9 psychological level next.

In Australia, Prime Minister Gillard noted that the recent depreciation in Australian dollar would help rebalance growth. And, in those circumstances, "sustained depreciation" would be a "very good thing" to "stimulate further growth in the non-mining sector". Some economists, including Goldman Sachs and BofA saw over 20% chance of recession in Australia. Gillard criticized that "confidence matters" and "any irrational threat to economic confidence is a threat to jobs and growth."

In the eurozone, Bundesbank head Weidmann said that "neither states nor the private sector should assume that the current phase of low interest rates is here to stay." He noted that "possible problems with government finances should certainly not delay the necessary tightening of monetary policy in the case of price pressures". He said he didn't see such price pressure currently.

Latest CFTC data showed further improvement in euro position, which turned net long at 20k, from -7.5k net shorts. That's the first net long position since February. Yen positions improved to -61.9k net shorts from -72.9k. The Sterling position improved sharply to -20.4k net shorts, from -53.7k. The Australian net short was relatively unchanged at 2013 low of -63.5k. The Canadian dollar net position improved to -26.1k net shorts from -35.9k.

The German Ifo business climate is the major data focus today.