Gold Jumps to $1420 as Traders Give up on the Financial System, and the USD China and USD Continue their Squabbles

Today the USD was higher against most other currencies, while Asian stocks were mixed, and the U.S. market was lower as this is being written. Today is not heavy on data, but markets have found enough to focus on in Europe's ongoing sovereign debt problems, and continuing comments by the Chinese about the recklessness of U.S. policy.
Meanwhile gold was as high $1422 per ounce, extending the uptrend in place since late August in accordance with the seasonal patterns that we have become used to over the years. Silver has also been charging higher, and reaching the highest level of the past 30 years or so in recent days' trading.

China needs a stable USD, officials say

The Chinese news agency Xinhua is publishing an excited article today about the issuance of reserve currencies, calling the U.S. monetary policy irresponsible (!), and demanding that the issuer of the reserve currency report to G-20 before undertaking major directional changes in policy. This comes in harmony with the recent comments by China's Deputy Foreign Minister, today's statements by the FM himself, and a long list of comments by various lower ranking officials to the effect that the U.S. has got some explanation to do even as it keeps blaming China on the yuan issue. In any case, since it is generally agreed that Asian currencies need to appreciate in order to clear the imbalances of the past decades, and to help manage the shift of lifestyles and wealth from the U.S. to the Far East, it is hard to comprehend what exactly the Chinese foresee as the alternative growth path for the world economy. Indeed, their proposed solution seems to be "business as usual", drunk as they are with their bubbles, but to proceed with no change really seems like a non-starter at this stage.
We do not in any way suggest that the U.S. administration is any more competent than the Chinese. We argue instead that both are equally clueless, but since markets and commentators generally enjoy criticizing the Federal Reserve and the Chairman more, we prefer to focus on the Chinese here, because, after all, this whole mess is the collective masterpiece of these two parties, and neither has any right to blame the other for its problems. Of course, that doesn't mean that certain ideas cannot have greater credibility than others. Yuan appreciation issue is one of those rare situations where the U.S. is right. The problem is that the Chinese are cornered politically and economically, and don't possess the freedom to do what they have to do sooner or later. This makes it appear as the intransigent side, but the truth is more complicated.
In other statements today, the state manager of China's FX reserves, SAFE, has announced new measures to restrict hot money inflows to the country. To limit the cash-geyser that is flooding the country, SAFE will "strictly enforce" quotas already in place that restrict short-term external borrowing of Chinese insitutions, and will tighten oversight of offshore investors' activities, in addition to managing the repatriation activities of Chinese companies carefully. A former member of the Standing Committee of the National People's Congress, and the chairman of the Chinese national pension fund also mentioned the Fed's QE2 today, focusing on the inevitability of hot money flows leading to inflation and appreciation pressures in the developing world. And as if to confirm the seriousness of the problem, today's sale of CNY3 billion fixed-rate 3-yr bonds was nearly 17 times oversubscribed by investors hungry for Chinese assets, bringing in demand of some CNY50 billion according to reports.
Yet not much should be said about these statements. The authorities are just as helpless as the majority of traders are in managing bubbles profitably. And nobody is too excited about SAFE "strictly managing" inflows of capital into the country, since, as the PBOC Governor admits, expectations of appreciation, and the interest gap between China and the developed world make the country too attractive to capital flows. With the existing positioning of international relations, and the external balance of the PRC, it is not possible to reverse the appreciation trend, and as such, finishing the task quickly may in the end help the government rein in speculative demand for the currency over the longer term, in spite of the difficulties that the economy will have to face as an immediate consequence.
Today the yuan was fixed at 6.6580 vs. yesterday's 6.6692. There are some rumors that the PBOC may once again raise reserve requirements for banks soon.

Greece auctions sees demand at higher interest, Irish Cds and bond spreads widen further

Inflation in Germany was released today at 1.3 y-on-y, confirming the belief that in spite of the excellent performance of the country over the past quarters, consumer demand remains lacklustre, and the risk of deflation is still here. This interpretation was confirmed by another release that showed comsumer insolvencies rising by 10.7% compared to the same period of last year. It is hard to see the ECB removing financial accommodation against this background anytime soon. In fact, as readers would know, they are busy pumping cash into the bond markets of the periphery, so any talk about normalization runs the risk of being regarded as hypocrisy by markets.
Ireland's CDS were once again higher today. Sentiment later in the day was improved somewhat by Greece's auction of 26-week, Eur300m bills which effected a bid-to-cover ratio of 5.15, confirming that high yield can still boost the attractiveness of the nation's debt. Nonetheless, rates were higher at 4.82% vs. the previous 4.54%. In short, there is cash for Greece, but at a suitable price.
By contrast to all these, 3-month Euribor eased a little to 1.049% from yesterday's 1.050. However, we still expect the rate to go alot higher from the current levels unless the ECB intervenes in the periphery aggressively in the coming weeks.
Today is a continuation of the past few weeks in almost every aspect. The one significant development is gold's rise above $1400. We learn that the 5-week average is located on the 1420 level, so the next few days will be critical for short-term price action in the precious metal.