Over the weekend, China reported a slew of economic data which not only draws the envy of every nation around the globe, but also their ire. Talk is heating up about Chinese currency “mis-alignment”, and the US House Ways and Means Committee is holding a hearing on Wednesday to discuss possible action. This could put additional pressure on the Chinese to allow there currency to appreciate.
In other news, the Basel III Accord set new requirements for bank leverage and capital ratios around the globe and gave banks ample time to get their houses in order. This comes as a relief to the market as fears of over-regulation have appeared to be quelled.
Thus the market is in risk-taking mode this morning; lead higher by global stock markets and commodities. US stock futures are also higher with the Dollar weaker across the board.
Elections tomorrow in Japan over control of the ruling party, the DPJ, have provided some uncertainty to the Yen, but overall it is lower as risk appetite has increased.
Today is primarily devoid of specific news from around the globe, so at this point the market is comfortable to take on risk until weak economic data rears its ugly head again.
In the forex market:
Aussie (AUD): The Aussie is mostly higher as the Chinese economic outlook is a positive for Australia. Economic confidence figures are due out on Wednesday but that’s about it on the news front so expect the Aussie to continue to trade on risk themes this week. (Click chart to enlarge)
Kiwi (NZD): The Kiwi is actually lower this morning despite the risk taking and positive Chinese outlook, as a report says that economic growth will have slowed as the economy lost output due to the worst earthquake the country has seen in nearly 80 years. Tomorrow’s retail sales figures and housing data will be followed by the RBNZ rate decision on Wednesday, which is expected to maintain current rates in light of the economic fallout from the earthquake.
Loonie (CAD): The Loonie is catching a major bid from higher oil prices which are trading at a 77 handle. In addition to last week’s positive jobs figures and rate hike, increased outlook over the US economic prospects has buoyed demand for the Loonie. This is a light week for Canadian economic data, so keep an eye on US economic data as a proxy.
Euro (EUR): The euro has rebounded and is showing the highest gains this morning as concerns over Basel III have been alleviated. This week, various pricing metrics will be released which will give a better idea of where the EU stands as far as the inflation/deflation debate, and German economic sentiment data is due out tomorrow. Expect the Euro to trade opposite to the Dollar for much of this week. (Click chart to enlarge)
Pound (GBP): The Pound is higher as well after Basel III is seen as giving banks more time to shore up their balance sheets than was previously expected. Tomorrow, the UK reports CPI data as well as housing and retail price figures. Wednesday brings the employment figures, followed by retail prices on Thursday and Consumer confidence figures on Friday.
Dollar (USD): Dollar weakness due to risk appetite and higher commodities and stocks around the globe is driving yield seeking. There’s lots of data due out this week in the US, lead by retail sales figures tomorrow, initial jobless claims on Thursday, and CPI and consumer confidence figures on Friday.
Yen (JPY): The Yen is mostly weaker on renewed economic optimism, particularly in China, yet is still tracking higher vs. USD. The election tomorrow to decide who will lead the Democratic Party of Japan (DPJ) has the markets on edge. As a side and on a personal note, I had an opportunity last week to be interviewed by a Japanese TV station regarding my thoughts on the Yen and will post the video if I don’t end up on the cutting room floor! (Click chart to enlarge)
Thanks to the Chinese economic data and growth outlook and less stringent bank regulations out of Basel III, the markets are starting the week in risk taking fashion. Without any major news to ebb the flow of risk appetite, this may be just the spark needed to jump start global markets.
While there is still considerable risk to global economic recovery, every day that the market can get by without a major disaster is a positive. One key component to global recovery and economic growth will be what happens with China and its currency.
Should the House hearing on Wednesday turn up the heat on the Chinese, we could be in for an economic showdown. While China still clearly has the upper hand, don’t underestimate the power of coordinated action or the US ability to undermine Chinese policy. The question is whether or not the political will exists to press forward.
Either way, expect increased rhetoric to keep the markets alert to any potential disruptions, which could induce volatility this week.
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