Risk appetite returned to the currency market on the last trading day of the week after monthly Chinese economic data showed continued growth in the Middle Kingdom, providing support for the global recovery trade. Chinese economic data for November was somewhat mixed but generally positive with Industrial Production rising by 19.2% versus forecast of 18.2% while inflation ticked up by 0.6%. This was the first increase in price levels in ten months indicating that deflationary pressures are receding.
As we wrote earlier, “Although other measure of economic activity such as Trade Balance (19.1B vs.24.0B) and Retail Sales (15.8% vs. 16.6%) were lower than forecast, the overall tone of the data was overwhelmingly positive demonstrating that China continues to expand strongly and remains the primary engine of global growth.”
Meanwhile in UK the PPI prices were a bit softer that forecast printing at 0.2% vs. 0.4% but still managed to rise at their fastest annual rate in nine months due to higher oil prices. The pound sold off mildly on the news as markets were looking for a hotter print, but the unit benefited from an announcement by Moody’s that it has no plans to downgrade UK sovereign debt. UK fiscal deficit problems have weighed on sterling all week long and while we think the issue is far from resolved, market concerns may be allayed for now especially if global economic data continues to prove supportive for the recovery trade and traders begin to speculate that UK government receipts will improve accordingly.
To that end today key event risk will be the US Retail Sales report due 13:30 GMT. Markets are looking at an increase in the core number of 0.5% from 0.2% the month prior. Preliminary data has been mixed with Christmas spending generally subdued but not horrid so far. Still, the US consumer remains cautious and if the numbers miss today, they could reverse much of the overnight flow if they lead to profit taking in equities ahead of the week-end. On the other hand an upside surprise would be yet another piece of evidence that final demand is improving across the globe and that economic recovery is maintaining momentum into 2010. A strongly positive number should help steepen the US yield curve and push USD/JPY higher – perhaps to another test of 90.00 as result of such news.
May The Force Be With You.
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