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Equity markets from Shanghai to Shenzhen rallied today as the increasing risk of deflationary pressure in China has led to an expectation that the People’s Bank of China will follow up with last month’s surprise interest rate cut with additional monetary stimulus. Speculation exists that in addition to last month’s interest rate cut the PBoC will cut the reserve ratio requirement in an effort to expand the availability of credit within the economy. The reversal in sentiment has come on the back of signs of continued weakness in the Chinese economy, as we saw a 2.7% decline in producer prices in November, the 33rd decrease in a row, along with a consumer inflation figure that also missed expectations coming in at 1.4% versus expectations of a 1.6% increase. As a result of this weakness, today saw a decline in the relative strength of the RMB versus the US dollar, with the Yen contrasting this move posting one its strongest gains against the buck as it moves to the 119 level despite the release dismal consumer confidence reports that once again missed expectations within the Japanese economy.

Despite renewed political uncertainty in Greece after the Prime Minister Antonis Samaris called for a snap election on Monday, the broader European equity markets have rallied after yesterday’s decline. While the fear appears to have temporarily abated there is a very realistic chance Europe’s weakest economy will influence a re-emergence of economic crisis within the Eurozone. The fear stems from the prospect of Samaris’ fragile coalition government losing power to the stridently anti-austerity Syriza party with the result being a refusal to abide by the terms of Greece’s previously negotiated bailout package. Along with this news, French industrial production and employment figures for November were released today and missed expectations, falling by 0.8% and 0.3% respectively. This signal of economic weakness in the Eurozone’s second largest economy along with the political tumult in Greece, and the corresponding impact on Greek debt, has undoubtedly put additional pressure on the ECB to expand asset purchases; however, the Euro has shrugged off this bad news and is currently changing hands in the high-1.23s.

Of particular consequence to oil producers, OPEC announced today that it has cut its forecast for demand in 2015. In light of continued expansion of oil production in North America along with a refusal from members of the cartel to reduce their own production, crude prices have had nowhere else to go but down, with WTI and Brent declining by 2.4% and 2.0% respectively. The continued decline in the price of oil has had widespread impacts in emerging markets, along with those of oil producing nations such as Canada, battering those domestic currencies relative to the greenback. The decline in crude prices along with continued signs of a divergence between the US and Canadian economies has the Loonie onfooting this morning, with the USDCAD pair trading in the high-1.14s ahead of the opening bell in North America.

Further reading:

 

Canadian dollar Hits 5-Yr Low Nears USD/CAD 1.15; More Weakness Eyed – Analysts

 

AUDUSD and USD/JPY have room for rises before turning down: Elliott Wave Analysis