USD Rises On Talk the PBOC Will Continue Tightening Monetary Policy

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The U.S. dollar is outperformed only by the commodity currencies on Thursday morning in the aftermath of speculation the PBOC will continue tightening monetary policy.

Earlier in the day, Chinese real GDP advanced 10.7% year-over-year in Q4, above the expected 10.5% gain and the revised 9.1% increase in the previous quarter, prompting speculation of additional monetary policy tightening in the region.

Indeed, China's December CPI gained 1.9% year-over-year in December, overarching the expected 1.4% increase and the previous 0.6% rise. Meanwhile, producer prices rose 1.7% on the year, above expectations for a 0.8% rate, and following the 2.1% decline in November.

Following the publication of the results, the People's Bank of China hiked the yield on three-month bill by 4 bps to 1.4088%, its second such move in 2009, and in a press conference, Chinese head of the National Bureau of Statistics Ma Jiantang told reporters in Beijing that the country now faces the challenges of balancing economic growth and inflation.

On the surface, the key question remains how quickly the central bank is willing to tighten policy in response to the data. After all, the PBOC has already raised the yield on three month bills twice this year and the yield on one year bills once.

More importantly, however was the 50 bps increase in the reserve ratio on financial institutions, which effectively means banks need to hold a greater proportion of liquid cash in the vault to cover their deposits. Such a move forcibly pulls money from the financial system and forces interest rates higher.

So far this month, tighter monetary policy from China has meant a stronger USD and yen, and this morning was no exception.

So far today, EUR/USD traded has in a range of 1.4029 to 1.4137, after last trading lower by 22 pips at 1.4083. Short term support lies at 1.4008 with resistance at 1.4512.

Meanwhile, cable last traded lower by 66 pips at 1.6226 after moving in a range of 1.6126 to 1.6312 today. Short term resistance lies at 1.6458 with support at 1.6116.

USD/JPY traded in a range of 91.19 to 91.88 today, and was last higher by 31 pips at 91.55. Short term resistance lies at 92.05 with support at 90.32.