Sentiments Weighed Down By China Investment Data, Dollar Recovers Mildly: April 17, 2012

The dollar regained some ground in Asian session today as sentiments were dragged down by China equity markets. Data from China's Ministry of Commerce showed foreign direct investment dropped for the fifth consecutive month by -6.1% yoy in March to $11.76b. Total number for Q1 dropped -2.8% yoy to $29.48b. FDI from EU dropped sharply by -31.2% to $1.4b in Q1 highlighting the impact from European debt crisis.

Some analysts noted that the droop in FDI also indicates reduced attractiveness of China due to yuan's appreciation in recent years and domestic inflation. And, it's believed that FDI will reduce the country's external surplus and thus lower the pressure for yuan to appreciate. Nonetheless, today's data still leaves China on course to meet it's target of average of $120b a year in the next four years.
 
As reported in China Securities Journal, published by PBoC, noted that "the current time represents a rare strategic moment to speed up capital account opening" and the yuan is "not far from becoming an international reserve currency." The report noted that the interest rate and exchange rate in China are not decided by "international capital flows." The report instead said interest rates should be decided by "domestic economic and financial conditions" while exchange rates should be primarily determined by "trade conditions with other countries." Last week, PBoC widened the trading range of RMB against USD by 50 bps to 1%.
 
The April RBA minutes signaled that policymakers did not consider cutting interest rates appropriate at the meeting, despite softer employment market and downward revision in economic assessments. The possibility of a rate cut appears lower than what is priced in the market. Yet, the CPI print for 1Q12 would be a key determining factor for the monetary decision. As stated in the minute, "members had lowered their assessment of the pace of growth somewhat" and "if slower growth in demand could be expected to result in a more moderate inflation outcome, then a case could be made for further easing of monetary policy."

Moreover, it's mentioned that there is an "opportunity at its next meeting to review the inflation outlook based on comprehensive new data on prices, as well as information on demand and output." These indicated that the inflation report for 1Q12 would be a determining factor for the monetary decision in May. More in RBA's May Decision Depends on CPI Data.
 
Spain's 12-month and 18-month bill auction will be closely watched today after 10-year yield touched as high as 6.16% yesterday, and is on course to the 7% unsustainable level which eventually pushed Greece, Ireland and Portugal for bailout. CDS on Spain also reached another record high yesterday as investors are in deep worry on whether Spain's austerity measures would be sustainable should recession worsens. Spain warned yesterday that it could seize control of finances in regional governments to meet the budget deficit cut and shore up investor confidence.
 
Japan pledged to use its foreign exchange reserves and contribute $60b in loans to IMF to curtail spread of European debt crisis. Japan Finance minister Azumi warned they can't be optimistic about situation in Europe yet despite recent policy efforts. IMF Chief Lagarde welcomed the move as an "important step forward in the ongoing international effort to strengthen the adequacy of the global resources available to prevent and fight crises and to promote global economic stability." Lagarde also urged other members to contribute more as the finance ministers from G20 are meeting in Washington later this week. Lagarde hopes to reach the "critical mass of more than $400b."
 
On the data front, Japan household confidence rose more thane expected to 40.3 in March. UK and eurozone CPI will be released and a main focus in European session in German ZEW , which is expected to deteriorate to 19.5 in April. From the US, new residential construction will be released with industrial production. The Bank of Canada will announce rate decision today and should keep rates unchanged at 1.00%.