·         China raises liquidity levels for banks, commodities fall

·         Gold, Oil, Copper, AUD, NZD and CAD all retreat

·         GBP stronger as market looks for good GDP estimate.

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The People’s Bank of China (PBoC) raised the level of bank reserves unexpectedly yesterday hitting commodity currencies hard.

Raised capital requirements are a form of fiscal tightening: the banks cannot lend out the money and instead have to keep it on the balance sheet. Most of China’s lending has gone to finance construction projects, fuelled by the commodities of the rest of the world, Australia in particular.

Commodity currencies took a bit of a beating yesterday and mining shares also fell around the world. AUD/USD was down 1%, NZD/USD lower by 0.4% and USD/CAD put on 0.5%.

The US dollar benefited as well after an unnamed Chinese sovereign debt official said that the dollar would not decline any further.

GBP was however the best performer on the FX markets as it reacted to news that its trade deficit narrowed by more than expected and news of good retail sales. The pound does remain range bound at the moment but these good data announcements are useful in giving sterling a little bit of a base.

FX markets will probably be governed by the global equity market reaction to the news out of China. At the time of writing the Chinese exchange is down over 3%. We would expect dollar to strengthen as a result, although the pound is looking hardy.

Sterling has risen overnight in anticipation that the NIESR’s estimate of our Q4 GDP will be positive. We also have manufacturing and industrial production from the UK as well.

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