China Tightens Policy, JPY Gains

The dollar was lower against the majors in the Tuesday session, sliding to 90.73 against the yen and to just shy of the 1.62-level versus the British pound. The global equity bourses also slumped, with the S&P500 and Nasdaq lower by over 1% while Dow Jones slipped by around 0.7% in afternoon trading. Meanwhile, spot gold was down by nearly 2% to $1,129.60 per ounce and WTI crude oil slipped by around 2.3% to $80.65 per barrel.

The economic calendar from the US was light, with just the release of the November trade deficit. The US deficit was slightly less than expected at $33.2 billion, versus a revised $32.9 billion from October. The data for the latter part of the week will include on Thursday: December retail sales, weekly jobless claims, November business inventories and on Friday: December real earnings, core CPI, CPI, industrial production, capacity utilization, January NY Fed manufacturing index, and the University of Michigan consumer confidence survey.

The key catalyst in market moves today largely stemmed from an unexpected change in policy from China. The PBOC surprised markets by raising the reserve requirements by 50-basis points overnight, effective January 18th. The move is aimed to cool down China’s economy, preventing it from overheating and preempting inflationary concerns. The move will likely be followed by further action over the coming months, in line with expectations for a global tightening of monetary policy as well – with the RBA the next likely central bank to hike interest rates again.