Morning Currency Wrap for Thursday January 20, 2011

China's Data Fan More Monetary Tightening - Chinese economic growth is on fire fanning fears that Beijing will have to intensify its easy going approach to tightening. China's GDP for Q4 was 9.8%, up from 9.6% in Q3, and better than the 9.2% that was expected. GDP growth for all of 2010 was 10.3% from 9.2% in 2009. Domestic inflation for December did come down to 4.6% compared to November's 28-month high of 5.1%, but it was still higher than the 4.4% that was expected. China has raised banks' required reserves seven times over the last year, but it has only increased consumer interest rates twice. The data reinforces the notion that China will have to be more aggressive in its tightening by utilizing interest rate increase and RMB appreciation in order to keep the economy and inflation from overheating. The market expects this to lead to a decrease in China's appetite for commodities thereby hitting the dollar block currencies of AUD, NZD, and CAD, which were all down in overnight trading. In Europe, the euro remained well bid on persistent demand from Asian sovereign accounts in order to diversify away from the USD, which is giving euro zone officials time to make progress on finding a sustainable solution to its debt crisis. Another German newspaper has pick up the story of stealth restructuring for Greece, which of course continues to be denied by all parties - euro area finance ministers are apparently discussing a plan to ease pressure on Greece by allowing it buy back its own debt using credits from the EFSF. Meanwhile, a cabinet shuffle in Japan demonstrates that the leadership is unhappy and it is causing the Yen to move lower on fears of more currency intervention after the Yen had pierced through the 82 level for the first time in two weeks. In Canada, the CAD is in danger of falling back below par against the USD on the risk off trade due to the stronger-than-expected Chinese growth data spurred fears of tighter monetary policy. The CAD began the week on its back foot after dovish language by the Bank of Canada raised some doubts about the timing of the next interest rate hike. I suspect that we will hover on either side of parity for the next little bit until we get the next piece of news that will power the CAD higher.