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The sound of China cracking can be heard across the global financial system this morning. Numbers published over the weekend showed that price increases in the country’s massive property market are beginning to decelerate, and policymakers announced that a raft of measures would be implemented in an effort to cool credit growth in the unruly “shadow banking” sector. Both of these factors are expected to impact growth in the short term, and helped to drive the real estate and financial components of the Shanghai Composite to material losses overnight.
The Japanese yen is trading near a two-month high, supported by safe haven buying, while the dollar remains on the defensive after long-term yields collapsed last week. The commodity complex is starting on a mixed footing, with base metals prices down sharply, while crude oil prices continue to march higher on tensions in Eastern Ukraine and Vietnam. The Canadian dollar is inching upward as a result, but remains contained by caution on the economy’s underlying growth prospects.

Carney-notes are exchanging hands near a five-year peak, after the Bank of England Governor issued his strongest warning yet on the island nation’s housing market, suggesting that a number of macroprudential measures would be used to reduce exposures stemming from surging prices. These are expected to include limits on loans, a reduction in government stimulus, and additional affordability tests, but the possibility of rate hikes is rising steadily.

Euro traders remain caught between Scylla and Charybdis, convinced that capital flows into the economic bloc will continue to lift the currency higher, while remaining aware that the European Central Bank fully intends to ease monetary policy in the near future. In effect, an artificial currency collar has been created in the markets, engendering a sense of complacency in commercial hedgers – and a sense of frustration for speculators who profit from volatility.

To us, this is a dangerous situation. The longer that these perceptions remain in place, the greater the sums that foreign investors will be willing to lend into the common currency area’s more vulnerable areas – and the greater the risk of an eventual wreck. Caveat euro trader…

Week Ahead:

Fundamental data releases will be few and far between over the coming week, but there are several events that are likely to trigger market turmoil.

On Wednesday, the Federal Reserve will release minutes from its last meeting, providing investors with valuable insight into the central bank’s views on the economy. Yields have been put under tremendous pressure over the past week, raising the possibility that a correction occurs – particularly if policymakers provide further information on the alternative tools they are considering for use in draining liquidity from the financial system ahead of rate hikes. Reverse repos have been discussed widely in recent weeks, but considerable uncertainty remains around when and how they might be implemented (see the WSJ article in the sidebar).

Canadian dollar traders will generally take direction from global themes through the early part of the week, but things will heat up toward the weekend. March retail sales numbers will land  on Thursday, followed by April inflation  on Friday  – both will be considered in relation to the Bank of Canada’s interest rate strategy. In the event that these numbers beat expectations, traders will look to position ahead of an eventual rate increase, and the currency could challenge recent highs. If some softening in consumer spending is evident, the opposite could occur – meaning that binary market outcomes are quite likely over the coming days.

Further reading:

The yen picks up

GBP/USD: Trading the British CPI