Dollar Bounces After Insurrection Put Down

China reported a slightly larger than expected rise in December reserves.  Its reserves rose by $38 bln in December, following a $50.5 bln increase in November, to stand at $3.22 trillion.  Bloomberg's survey median forecast was for $3.20 trillion.  The other major reserve currencies appreciated so valuation may have helped lift the reserve holdings.  The challenge is that between the trade surplus and capital inflows, many economists would expect greater yuan appreciation (less than 1% in December) or stronger growth in reserves. The PBOC appears to have various levers that can be used, including policy banks and sovereign wealth fund.  The US Treasury's recent report was mostly critical of China for the lack of transparency in currency matters. 

Objecting to Australia's alliance with the US, Beijing has blocked a wide variety of its imports.  However, Australia's trade figures have been fairly resilient.  Earlier today, it reported that  November exports rose 3%.  Economists surveyed by Bloomberg expected a 2% decline.  Exports to China fell by about A$300 mln in November, but this was more than offset by the nearly A$1.3 bln increase in exports to the US and A$150 bln increase of shipments to Japan. Exports to Singapore also rose by around A$1 bln.  Iron ore exports fell 7.9% from a record-high in October.  Coal exports were off by nearly as much.  Gold exports surged by almost 40% in the month (to A$2.6 bln).  Australia's imports jumped 10% in November, more than three times greater than expected.  The trade balance was a A$5.02 bln surplus down from a revised A$6.58 bln in October.  

The dollar bounced sharply yesterday after reaching a new 10-month low yesterday near JPY102.60.  It managed to settle just above JPY103.00, and today reached almost JPY103.60 in the European morning.  The jump in Treasury yields and the yen's relative strength may be encouraging insurance companies and investors to step up their foreign bond buys.  The dollar has not traded above JPY104 since mid-December.  The Australian dollar poked above $0.7800 yesterday and tried again today, but the market looks a bit stretched after rallying by about two cents in a little more than a week.  Initial support is seen near $0.7730, and a break could signal a leg lower toward $0.7640.  The PBOC set the dollar's reference rate at CNY6.4608.  It is a little weaker than the models, but closer than it was yesterday.  The dollar reached a low near CNY6.643 on Tuesday and has been consolidating in a narrow range since (~CNY6.4515-CNY6.4665) as officials are believed to have signaled a desire to temper or slow the yuan's gains.  

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Read more by Marc on his site Marc to Market.

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