17 února 2010

17/2 Tension between US & China

Mads Kofoed, Market Strategist, Saxo Bank

Relations between the US and China have undergone some tension lately, mainly due to the US warship in Hong Kong and the forthcoming meeting between Obama and Dalai Lama. What impact could these events have on capital markets? Is China going to do anything against the US that could potentially harm the US economy?

We don’t believe that China is going to do anything harmful to the US. The two countries simply benefit too much from each other to throw that overboard. However, we can understand that people ask these questions. Yesterday we found out that China had sold off some of its US debt and that Japan therefore had overtaken China as the largest holder of US debt. Taking these numbers at full value – which you shouldn’t necessarily do since China is known for buying debt through other channels – if sure does look like China is diversifying its portfolio slightly, but they are still a large holder of US debt.

While China could potentially wreck havoc with a large selloff in US debt, we as stated do not believe that will do such a thing since it would also hurt their own economy if the US lands in new economic troubles. Remember, that the US is a large buyer of Chinese produce, and China experienced a rapid and severe drop in exports when the recession set in globally.

So no, at present we don’t believe China will do anything to harm the US economy. China is still as dependent on the US economy as the US economy is on China‘s.

Ken Veksler's Market Commentary

Good morning,

Allowing for an extended absence due to travelling on business as well as an unfortunate bout of food poisoning I’m back albeit in less than stellar form.
Given all of the above I am hard pressed to have a clean view on this market other than to say that we are in the midst of seeing some extreme price action which is likely to continue into the end of this week. By extreme I mean the fact that we’ll be jumping from one end of the scale to the other rather than anything particularly volatile. In fact if anything we’re seeing very quiet price action at the moment, it’s been deathly quiet the last day or two.

In reality all that’s happening is the selling out of an overdone long USD position across the board and this will likely swing back in the coming days. What does that mean for the majors? EURUSD should sit below 1.3830/50 with a decisive break above opening 1.4030, I however remain a cautious seller into 1.3850 with tight stops looking for a move back into 1.3650 and/or 1.3580.

Elsewhere it’s a similar story in that the USD will come back and it’s just a matter of getting your timing right.

Data wise we have UK unemployment as well as FOMC minutes later today. I’m not sure that either will necessarily be market moving in the broader scheme of things.

Clearly I’m still not feeling 100% and the above reflects that, so apologies…
I will be once again travelling over the next couple of days (no rest for the wicked) and should be back in the office next Monday.

Best regards,

Ken Veksler

С Уважением | Yours Sincerely | Med venlig hilsen

Ken Veksler - Senior Manager | Trading and Advisory
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