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China Goes On Holiday After Injecting Stimulus Into The Markets

By:
Barry Norman

The Peoples Bank of China didn't go on holiday quietly. On Saturday the bank unveiled a huge new stimulus program and today released its monthly currency

China Goes On Holiday After Injecting Stimulus Into The Markets

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The Peoples Bank of China didn’t go on holiday quietly. On Saturday the bank unveiled a huge new stimulus program and today released its monthly currency reserve figures. China will be on holiday through Friday, February 12th which should lower market volume and volatility. China’s foreign currency reserves plunged by $99.5bn in January, the People’s Bank of China reported.

China has been running down its vast foreign currency reserves in an attempt to boost the value of its own currency and stem a flow of funds overseas. At $3.23 trillion, China still has the world’s biggest reserve of foreign currency holdings. But that has declined by $420bn over six months and stands at the lowest level since May 2012.

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The Chinese authorities fear a rapid devaluation of their currency, as it could destabilize the economy. Many Chinese businesses hold debt in dollars and managing those debts with a severely weakened yuan could cause problems and some companies to fail. So China has been trying to engineer an ordered devaluation of the yuan, but that is proving hard to deliver. Investors have been trying to pull funds out of investments priced in yuan and speculators have been betting on further falls in the currency. To stabilize the situation China has been selling dollars and buying yuan. The yuan is trading at 6.5739. and is expected to remain flat with the PBOC not seeing its daily fix during the holiday.  China’s central bank pumped more short-term funds into the country’s financial system on Saturday, as a surge in demand for cash ahead of the Lunar New Year holiday is starting to squeeze banks’ liquidity. Wary of a potential funding shortage as a result of the holiday, China’s large banks in recent weeks have lobbied the People’s Bank of China to significantly ease credit by reducing the amount of deposits they hold in reserve.

The only news in the Asian theater this morning came from Japan where the current account fell short of expectations. Japan’s current account surplus shrank in December to its lowest level in six months. The yen is trading at 117.32 giving up 43 points against the US dollar and falling 23 points against the euro to reach 130.57. Japan posted an 18th consecutive current account surplus as cheap energy imports continue to aid an economy that’s struggling to produce sustained growth and inflation.

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The excess in the widest measure of the nation’s trade was 960.7 billion yen in December, from 225.9 billion yen a year earlier, the Finance Ministry said Monday in Tokyo. The median estimate of 25 economists surveyed by Bloomberg was for a surplus of 1.05 trillion yen.

The kiwi gained 13 points on stimulus from China to trade at 0.6638 with markets closed for a local holiday today. The Aussie gained 18 points to 0.7086 helped by a significant jump in iron ore prices.

The big news this week will be two days of testimony by Fed Chief Janet Yellen.  The dollar rose for a second day against the euro and yen as investors looked toward Federal Reserve Chair Janet Yellen’s testimony to Congress Wednesday for signs of whether markets are underestimating the odds of a near-term interest-rate increase.

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The greenback climbed after a U.S. employment report on Friday showed wage growth exceeded estimates, bolstering the case for the Fed to lift rates this year. Futures pricing for a move before year-end climbed to 53 percent Friday from 46 percent the previous day. The yen weakened versus Australia’s dollar as equities in Japan pared declines and the nation reported a current-account surplus that was smaller than economists had forecast.

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