FX: More Good News from China?

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Daily FX Market Roundup 08-08-12

FX: More Good News from China?
AUD: More Potential Volatility from RBA Statement and Chinese IP
CAD: Employment Numbers on Tap
NZD: Lifted by Chinese Data and Higher House Prices
GBP: Narrower Deficit Expected for UK Trade
How Far Can USD/JPY Decline?

FX: More Good News from China?

With no major U.S. economic reports scheduled for release this week, the focus has been on China. Today’s rally in equities and currencies were driven primarily by Chinese trade figures which at first glance, fell short of expectations as the country’s trade surplus shrank to $17.82B from $27.12B. However the reaction in the markets was positive because exports and imports rose strongly. Not only did exports recover but imports also rose a whopping 10.9%. The last decade was all about watching Chinese exports as a measure of global demand but with the new leadership, China’s focus on domestic consumption is making imports increasingly significant. China is still an export dependent economy but a rise in imports would suggest that the export sector or the economy as a whole is performing well enough to fuel domestic demand. It is for this very reason that investors have responded positively to the apparent stabilization in Chinese trade data. Without the good news from China last night, currencies and equities would have probably resumed their slide. More data is expected from China tonight and the focus will be on inflation and industrial production. Price pressures are expected to increase slightly but industrial production could see a stronger rise because stronger imports imply the need for increased manufacturing production. If tonight’s Chinese data beats expectations, we could see a stronger rally in equities and currencies.

Meanwhile the U.S. dollar lost value against all of the major currencies today with the exception of the Japanese Yen. U.S. weekly jobless claims rose slightly from 328K to 333K. The absolute amount of claims is still low and consistent with an overall recovery in the labor market and while continuing claims rose to 3.018 million from 2.951 million, the 4-week moving average dropped to its lowest level since November 2007. Unfortunately this data had very little impact on the dollar. Instead, falling Treasury yields kept the greenback came under pressure. Today’s 30-year bond action saw the lowest bid-to-cover ratio since the U.S. lost its AAA rating in August 2011. This may reflect weaker demand for U.S. assets but according to Bloomberg, demand from an investor class that includes foreign central banks was above average. As there are no U.S. economic reports scheduled for release over the next 24 hours, Chinese data will drive flows in equities and currencies into the end of the week.

AUD: More Potential Volatility from RBA Statement and Chinese IP

The Australian dollar endured some wild swings overnight, having initially fallen on weaker employment numbers only to recover strongly on the back of Chinese data. Australia feeds China’s thirst for iron ore and relies on its demand for growth. The volume of iron ore imported by China in July was the largest this year, which is a very good sign for Australia’s economic outlook. Traders should expect the volatility in the AUD and Aussie related pairs to continue over the next 24 hours with Chinese inflation and industrial production numbers scheduled for release along with the RBA’s Quarterly Statement on Monetary Policy. We y discussed how Chinese data could surprise to the upside (although when it comes to Chinese data we can never rule out a downside surprise), the quarterly monetary policy statement is not expected to be supportive of the AUD. Considering that the RBA cut interest rates by 25bp when they last met, the quarterly statement should contain a more dovish tone that could counteract some of the upside pressure on the currency. Yet the Australian dollar won’t be the only currency in focus tomorrow. Canada is also scheduled to release its employment report. Job growth is expected to have accelerated in the month of July as employment conditions improve in the manufacturing sector. According to the latest IVEY PMI report, employment returned to expansion in July. The Canadian dollar rose strongly today in anticipation of this key release but higher house prices also helped. Stronger housing market numbers were also released from New Zealand but the rise in NZD can be mostly attributed to Chinese data.

EUR: Shrugs Off ECB Growth Downgrade

The euro rose to a 1 month high against the U.S. dollar on the back of stronger trade data. German exports increased for the first time in five months by 0.6% but missed the estimate of 0.9%. Yet Germany’s trade surplus rose to 16.9 billion euros against expectations for 15.0 billion euros. Chinese shipments rose 5.1% in July year-over-year after a 3.1% decline in June. This lift helped the euro shrug off lower growth forecasts from the European Central Bank. In their monthly bulletin the ECB said that Euro-zone growth will contract by 0.6% in 2013, which is worse than their prior outlook of -0.4%. GDP is also predicted to rise 0.9% in 2014, less than the previous estimate of 1%. Despite these revisions, however, the ECB says the Euro-zone will gradually recover through the end of 2013 and may carry on to next year. Draghi has pledged to keep interest rates low to support growth. In the report it said, “Annual inflation rates are currently expected to fall temporarily over the coming months, owing in particular to base effects relating to energy price developments 12 months earlier.” Inflation is expected to remain hovering around their 2% target over the medium term.

GBP: Narrower Deficit Expected for UK Trade

The overall improvement in risk appetite today also drove the British pound higher against the U.S. dollar. No U.K. data was released this morning but trade data is expected tomorrow. With upticks in industrial production and the manufacturing PMI index, our views are in line with the consensus forecast for an improvement in trade conditions. As trade and retail sales are the primary components of GDP, a smaller deficit would also be consistent with the Bank of England’s upgraded GDP forecasts. They now expect 2013 GDP growth to be 1.5%, up from the meager 0.2% growth experienced in 2012. The GBP/USD is currently trading above 1.55 and while further gains are possible especially if the trade numbers surprise to the upside, we still believe that gains will be limited to the June high of 1.5750. The same is true for EUR/GBP where we expect losses to be limited to 0.84 cents.

How Far Can USD/JPY Decline?

The Japanese Yen traded lower against all of the major currencies today. At one point, it looked like USD/JPY would close lower for the fifth consecutive trading session but a gradual recovery after the European close left the pair in positive territory. While the Bank of Japan left interest rates unchanged last night, they nudged up their expectations for inflation slightly by saying that, “it appears to be rising as a whole” but did not officially alter their economic assessment. Comments from BoJ Governor Kuroda were more upbeat – he indicated that the downside risks as a whole have moderated to some extent in Europe and China. He also noted that income and spending conditions have improved. Japanese purchases of foreign bonds also hit its highest level since August 2010, which should have been negative for USD/JPY. Unfortunately the continued slide in the Nikkei and lack of upward momentum in U.S. yields has prevented USD/JPY from rallying materially. From a technical perspective, there is no major support in USD/JPY until 95 and even then, beyond the psychological significance of this level, there is not much standing in the way of USD/JPY revisiting its June lows at 94. Aside from being a swing low, the 94-94.20 level coincides with the 38.2% Fibonacci retracement of the 2007 to 2011 sell-off that took the pair from a high of 124.15 to a low of 75.57. From a fundamental perspective, the reasons for buying USD/JPY including Fed tapering and BoJ easing remain intact but at this stage, we would prefer to wait for the currency pair to stabilize and start to turn higher before buying.

Kathy Lien
Managing Director

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