Dollar Mixed, Sterling Stellar

The US dollar is mixed today. The euro was sold to $1.3735 which is seen as the lower end of the recent trading range managed to recover in Europe. Sterling has been the outperformer as the Bank of England's quarterly inflation report gave no hope for a resumption of asset purchases any time soon. UK gilts tumbled, but sterling rallied more than a cent. Meanwhile, the greenback is at its best level against the yen since Oct 12. China's trade surplus was larger than expected--mostly because imports were lower than expected. This coupled with the tightening of inflows yesterday (via bank fx exposures) will rankle China's critics at the G20.

On the eve of the G20 meeting, Taiwan has announced measures that limit foreign ownership of domestic debt (government bonds and money market) to 30% of the portfolio. This may have weighed on Taiwanese bonds a bit (10-year yield up 2 bp, 5-year up 4 bp), but more important, it may continue to encourage foreign funds mangers to buy Taiwanese shares and may not help moderate the upward pressure on the currency. Foreign investors have poured roughly $2.4 bln into Taiwanese shares already this month, which is a full third of this year's entire equity inflow. Even though the central bank is believed to intervene almost daily, the Taiwanese dollar's 1.4% gain this month makes it the strongest in Asia.

China announced intentions yesterday that will force banks to hold on to more foreign currencies and this is another species of deterring capital inflows. Today's move to hike reserve requirements 50 bp is a different kettle of fish. It is a continuation of the existing policy trajectory and follows the recent increase in the benchmark 1 year rates. Many are also reading it as a tell ahead of tomorrow's CPI which is expected to rise to 4% or a little higher from 3.6% in Sept. While some will complain that the Fed's QEII and unilateral measures taken by other countries reflects a breakdown in cooperation, in fact, international relations has always been an arena in which national self-interest is pursued. The G20 offers a larger forum for this competition. No country would have it any other way, even as they insist on other countries taking their interests into account.