More Pain For Commodity Currencies as China Trade Slows

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Market Drivers Aug 10, 2015

Commodity dollar slide continues in wake of weak CNY data
Euro hold relative bid
Nikkei 0.41% Europe -.07%
Oil $43/bbl
Gold $1094/oz.

Europe and Asia:
JPY Eco Watchers 51.6 vs. 53.1
EUR Sentix 18.4 vs. 20.2

North America:
USD Labor Market Conditions Index 10:30

The dollar regained some footing at the start of the week’s trade with only the euro showing any relative strength against the buck as the pair continued to hold above the 1.0950 level. The euro may have gained a modicum of support from news that Greece was making progress on ironing out terms for its third bailout, but most likely the pair was just seeing some short covering across the board as it continued to perform well against the pound and the commodity dollars.

The commodity currencies continued to see downward pressure in the wake of weak Chinese Trade data over the weekend. China reported a Trade Surplus of $43B versus expectations of $55B as exports slumped a whopping -8.3% on a year over year basis. Imports also declined by -8.1% suggesting that the broad slowdown in Chinese economy continues.

The news is unlikely to please Chinese authorities who continue to target 7% GDP growth rate this year as they attempt to turn the country’s economy towards services and consumer spending rather than industrial production. Although the latest data points which include weakening PMI numbers as well indicate that PBOC should ease once again – the monetary authorities find themselves in a bind. Any cut in rates could cause capital outflows and the country’s foreign reserves already fell by $42 Billion in July.

The slowdown in China continues to take its toll on the commodity currency block with Aussie, kiwi and loonie all making fresh session lows in morning European trade today. The loonie appears to be especially vulnerable to more declines as oil slips to $43/bbl and any test of the $40/bbl handle in the WTI crude contract could push the pair towards the 1.3500 figure over the near term horizon.

Analysts are now starting to anticipate the possibility of recession in the commodity based economies with Canada looking most likely to slip into negative growth territory if crude remains at the current low price for an extended period of time.

In North America today the eco calendar is barren but both Stanley Fischer and Dennis Lockhart will make some remarks today and if they make any comments on Friday’s NFP results the dollar could see an impact. As most of the analysts pointed out, the NFPs provided a mixed picture with labor conditions showing a steady improvement but wage still anemic. To that end this weeks US Retail Sales could prove to be vital to market’s expectations of a September rate hike. The consensus view is that Retail Sales are supposed to rebound from last month’s -0.1% reading, but if the numbers once again miss their mark, it will be hard for the Fed to make an argument for tightening amidst global economic slowdown a clearly weak US consumer demand.

Boris Schlossberg
Managing Director

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