The risk trade was on in full force in overnight trade as high beta FX rose steadily in Asian and early European session in the wake of strong data from China and better employment results from UK. Chinese Industrial Production, Retail Sales and Trade Balance numbers all beat expectations suggesting that the Asia giant remains the locomotive of the global recovery trade.
Chinese IP printed at 16.1% versus already high expectations of 15.3% while Retail Sales rose 16.2% vs. forecast of 15.7% and Trade Balance increased to an impressive 24.0 Billion against projections of 19.2 Billion. The latest batch of data will no doubt put further pressure on Chinese authorities to allow for some yuan appreciation, as everyone from China’s ASEAN neighbors, to ECB Chief Jean Claude Trichet to President Obama have all expressed concern over the weakness of the renminbi in light of China’s meteoric economic growth.
However, given the history of Chinese currency management we believe that any appreciation in the yuan will be gradual and measured at best, as authorities make sure that the rise does not hurt the prospects further growth. A rise in the yuan should help boost domestic demand, assuming global recovery trends remain on track and one side beneficiary of this dynamic will the Aussie as Chinese investors continue to pour capital into the country’s natural and real estate resources.
The AUD/USD hit a fresh yearly high on .9345 in overnight trade, but in the near term we remain cautious on further upside in the pair ahead of the key employment data tonight. Last night sharp drop on Westpac consumer confidence survey – the first in more than 5 months – suggests that the recent tightening of credit by the RBA is already producing contractionary ripples through the Aussie economy. However, if the jobs data surprises to the upside markets will once again price in the possibility of yet another rate hike by the RBA before year end and such a scenario could push the pair to .9500 is risk flows prove supportive.
Meanwhile in UK the upside eco surprises continued with jobless claims printing at 12K vs. 20k eyed while ILO employment actually increased for the first time in more than a year and half as the rate dropped to 7.8% from 8.0%. Cable rose to 1.6780 in the aftermath of the report but quickly receded off the highs ahead of the BoE Quarterly inflation report with traders worried that UK monetary official will continue their QE policy in spite of clearly improving economic fundamentals.
In North America, the Veterans day holiday has banks and fixed income markets closed today suggesting a relatively quiet session ahead. With equities up for five straight days in a row a retrace is due and that could impede any further in risk currencies for now.
May The Force Be With You.
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