The week begins today. Finally, we get a slew of data that is beginning to make some noise. Some of the tweaking and recalibration of the Chinese inflation release is having only a modest affect on risk and Asian currencies. The lower than expected, but elevated print is proof that rising food, housing inflation, will keep headline inflation elevated and require Chinese policy tightening to be front-loaded. This is obviously a risk to domestic growth, handcuffing the PBOC in being more hawkish on their exchange rate policy.
Another King’s letter will outline UK’s inflation concerns. This morning Governor King said that there is a ‘great deal’ of uncertainty about the path of UK annual rate of inflation (+4%) over the medium term and ‘real differences’ of opinion. Rates have only one way to go and that’s up, but when?
Elsewhere, Euro data is tentatively supportive. German ZEW index came in at 15.7 this month with current conditions rising to 85.2 vs. 83. The weather has been well documented for the last quarter and it was not a surprise to see Euro growth on the soft side (+0.3%). State side should provide further noise. Positive momentum is expected to support the New York’s release of its Empire manufacturing numbers and the market expects retail sales to have posted a seventh consecutive monthly gain last month.
The US$ is mixed the O/N trading session. Currently, it is higher against 9 of the 16 most actively traded currencies in a ‘whippy’ O/N session.
With the lack of data out of the US yesterday, the spotlight was firmly on NY Fed Governor Dudley, a permanent voting member. He is beginning to exhibit cautious optimism, which is nice to see from a ‘dove’. ‘There are emerging signs that the consumer is spending more and are willing to take on new debt, which bodes well for another step forward with economic momentum in the nation and the region’. In translation, economic recovery is still not up to expectation, but headed in the right direction. The doves will find it difficult to justify an extension to the asset-purchase program. In other words, there should be no QE3. If the US unemployment rates continues to soften, and if consumer credit flows continue to expand, the Fed will not only let QE2 end, but the market will be pricing in rate hikes. Fed-fund futures maintain, with near certainty, expectations for the FOMC to begin tightening later this year. For December 13th, they are pricing in a +96% chance for the committee to hike rates to +0.5%.
The USD$ is lower against the EUR +0.34% and CHF +0.08% and higher against GBP -0.03% and JPY -0.25%. The commodity currencies are stronger this morning, CAD +0.34% and AUD +0.01%. The loonie continue to ride the surprising Trade surplus wave from last week. It was the country’s first surplus in 10-months with energy and metals ‘powering the biggest jump in exports in almost three decades’. Exports jumped +9.7% to $37.8b, as energy shipments advanced +25% and industrial goods rose +7% to a record high. Imports rose +0.7% to $34.8b. The data happened to push the loonie higher against most of its major trading partners on speculation that Governor Carney will hike borrowing costs quicker than other Cbank. Swaps traders are pricing that the BOC will raise its target lending rate by +0.83% over the next 12-months, up from +0.60% a week ago. The trade deficit was one of the last pieces of the puzzle for the BOC. Parity, the new paradigm, is becoming well adjusted too by investors, consumers and manufactures. With the Euro-peripheries back in the picture we may be back to less risk safer heaven, until then, expect CAD to outperform on the non-U.S. dollar crosses. Against the dollar, better sellers have appeared on dollar rallies (0.9854) now that Chinese CPI was less than expected.
The AUD temporarily strengthened to a nine-month high vs. the JPY in the O/N session after Chinese inflation data saw CPI rising less than expected (4.9% vs. 5.3%). This has boosted the demand for higher-yielding assets. Also aiding the currency was the RBA minutes from this month’s meeting stating that a ‘slightly restrictive’ policy stance was appropriate as a resources boom boosts incomes. The minutes offered no new real news, but stated clearly that the medium-term outlook for the Australian economy remains robust. Analysts believe that Governor Stevens is waiting for the consumer to start consuming before looking to hike rates again. For the time being, policy is ‘appropriate’ in ‘restrictive’ territory, and is dependent on the consumer when rates will rise again. Last week, the market pricing for rate hikes over the next 12-months fell-4bp to +34bp. Analysts note that with futures dealers interpretation, combined with such a clear message from Stevens, still leaves the rates market vulnerable to the weaker data on lending and consumption over the next few months. Last week, the AUD reacted negatively to a Chinese rate hike, reasons that forced the liquidation of the weak long carry trades who had been influenced by the market pricing for RBA rate hikes. With risk appetite on the up and Chinese CPI less than expected has investors wanting to acquire the carry trade again (1.0032).
Crude is little changed in the O/N session ($85.01 +0.20c). The insurance premium is been priced out to some extent. The Egyptian military is promising a transition to democracy ‘soon’ and indicated that the country will honor its peace treaty with Israel now that Mubarak has ‘resigned’. West Texas rose and Brent climbed to it highest price in over two-years after the Chinese export numbers surged, signaling strong demand in the world’s biggest energy-consuming country. Concerns about the Middle East and production problems in the North Sea are boosting Brent relative to WTI. The value of the Yuan is also aiding commodity prices. After reaching a 17-year high vs. the dollar it is making it much cheaper for them to acquire ‘their’ coveted commodities. Last weeks EIA report revealed no surprises. Both crude and gas stocks happened to edge higher. Fundamentally there is far more oil in storage, more fuel capacity and more idle oil wells to limit a much stronger market rally. It is the fear of a sudden reduction in supply from the Middle-East that will support commodities longer term.
A calmer political outlook for Egypt has subdued investors’ appetite for safe-harbor assets like gold. The market is not witnessing the same level of speculative fund and ETF participation that occurred throughout December that allowed the commodity to finish the year with a +30% return. A stronger dollar is negative for the asset class, as it makes it more expensive to foreigners. That being said, the commodity that every investor hated last month continues to find support on deeper pullbacks. This is because the Middle-East remains the unknown variable. Prices are close to a three-week high on demand for a hedge against rising consumer prices after China increased borrowing costs. The commodity is being used as a store of value. Has the commodity peaked or is it simply a short-term correction? The commodity is attracting technical buyers after rallying above its 20-day moving average. On deeper pullbacks, the metal should remain better bid on speculation that currency volatility will boost demand for a safe heaven investment once the Euro contagion fears raise its ugly head again over the coming weeks during the Euro-periphery refunding season ($1,372 +$7.50c)
The Nikkei closed at 10,746 up+21. The DAX index in Europe was at 7,398 up+2; the FTSE (UK) currently is 6,058 down-2. The early call for the open of key US indices is higher. The US 10-year eased 1bp yesterday (3.63%) and is little changed in the O/N session. The Fed completed the first of four-rounds of US securities purchases yesterday, temporarily supporting the longer end of the yield curve. The two-year yield remains close to an eight-month high as refuge demand eased after Mubarak resignation and the country’s military moved toward elections. However, the market continues to be nervous about other regions in the Arab world. Investors will look to economic reports for more confirmation of the global recovery with the bias towards higher rates. These higher yields continue to support the dollar.
