U.S. DOLLAR: CHINA’S BIG NIGHT
It has been an extremely active day in the currency market with the U.S. dollar rising to a 5 month high against the euro. Dollar bulls were in full control today as the greenback strengthened against every major currency. Although we would have liked to say that the dollar has risen on stronger growth prospects in the U.S. – it was the fear of a slowdown in the global recovery that sent investors back into the safety of U.S. dollars. It is no secret that the global recovery has been driven largely by growth in China and the country’s recent initiatives to slow their economy has sent shockwaves across the financial markets. Last week, China raised reserve requirements and yesterday they increased their T-bill rate. Today they announced plans to control the pace of credit growth and there has even been speculation that they will restrict bank lending. These announcements indicate that China is growing nervous about their about inflation and asset bubbles and to prevent the economy from crashing down, they are slowly pressing on the brakes. Unfortunately at a time when the global recovery is still fragile and the world really needs continued demand from China, currency traders are reacting negatively to any risk of that demand slowing.
It is China’s Big Night ….
As we have seen today, developments in China can have a huge impact on the U.S. dollar and the global financial markets. That is why it will be particularly important to keep an eye on China tonight because there is a barrage of Chinese economic data due for release this evening. This includes China’s annualized GDP rate, which tells us the degree of Chinese growth last year, but also inflation data, retail sales and industrial production. Besides GDP growth, every piece of Chinese data is expected to improve, which explains why the government has been actively trying to slow the economy. In the beginning of 2009, in the midst of the worst recession since the Great Depression, China pledged to maintain 8 percent GDP growth. At that time, this rapid pace of growth was difficult for most people to imagine but in retrospect, we can now see that China engineered this growth by injecting massive stimulus into their economy. The market expects the government to report 8.5 percent growth for 2009 (at constant prices), which would be down from 9.0 percent the prior year. However we would not be surprised to see stronger growth. On a quarterly basis, the economy is forecasted to grown by a whopping 10.5 percent in Q4. Stronger numbers from China should improve risk appetite, which would be positive for higher yielding currencies and negative for the dollar. On the other hand, weaker numbers could exacerbate the sell-off in currency pairs such as the EUR/USD. Either way, expect additional volatility in the forex markets when Chinese economic reports are released at 21:00 EST or 02:00 GMT.
But U.S. Data Will Matter as Well
From the U.S., jobless claims, the Philadelphia Fed index and leading indicators are also due for release. Stronger numbers are expected all around which could help risk appetite. The latest Producer Price figures indicate that inflationary pressures are not strong enough for the Fed to bat an eye. PPI increased 0.2 percent in December after rising 1.8 percent the previous month. Excluding food and energy prices, PPI was flat. Although this did not stop annualized PPI from rising to 4.4 percent, the highest level since October 2008, growth in core PPI yoy fell from 1.2 to 0.9 percent. The absence of inflationary pressures on a core level is more significant. Meanwhile, the 4 percent decline in housing starts and 10.9 percent rise in building permits offer a conflicting outlook for the housing market. However the data suggests that the sector is continuing to recover because permits reflect plans for future activity and is therefore more significant than housing starts. Also, starts are subject to weather factors and inclement weather in December prevented builders from breaking ground on many housing projects. Finally the Republican win in Massachusetts and the increasing cost to insure Greek debt added additional demand for dollars.
EUR/USD: GREECE CONTINUES TO WEIGH ON THE EURO
The euro came under aggressive selling pressure after breaking below 1.4250, a critical support level. For the past 5 trading days, the euro has failed to rally against the U.S. dollar. Intensifying concerns about Greece and weaker economic data increases the likelihood that the European Central Bank will sit on their hands just as long as the Federal Reserve. Late last year, there was a widespread belief that the ECB would raise interest rates before the Fed because of improvements in their local economies and increasing price pressures. However, inflation is beginning to subside and data has taken a turn for the worse. German producer prices decreased by 0.2 percent, the first decline in 3 months. The weakness of the euro continues to be underlined by concerns from Greece. Today’s markets pushed yields on Greek bonds to the highest level since joining the euro-zone. This pushes the spread over the risk-free German Bund to a 10-month high. These developments are extremely concerning because the higher rates signal that the country will find it much more expensive, and equally harder to find investors with the risk tolerance necessary to offer financing. With an additional €54 billion in planned borrowings for this year, it is starting to look doubtful that the country will be able to pay its creditors. Responding to the terror the Greek situation has inflicted, the IMF’s Managing Director Strauss-Kahn offered some calming words in that Greece’s problems will not “lead to a fragmentation of the Euro-zone.” However, yesterday’s meeting of policy makers on the issue had a decidedly different tone, with one member urging that the “fate of one is the fate of all”. It is likely that developments on Greece’s situation will continue to be the most important factors moving the Euro going forward. Service and manufacturing sector PMI reports are due from the region tomorrow which will shed more light on the overall outlook for the Eurozone economy.
GBP/USD: EMPLOYMENT HELPS POUND RESIST FALL
Despite relatively modest losses, the pound remains resilient in the face of exaggerated dollar strength. The outperformance of the pound can be best seen in EUR/GBP which declined for the seventh out of the last eight trading days. Economic data was positive all-around as the U.K.’s employment situation suddenly seems less dire. Jobless Claims fell at the quickest rate in more than two years, heading lower by 15.2K. The fall off in individuals seeking unemployment benefits has resulted in a slight easing in the ILO Unemployment rate from 7.9% to 7.8%, marking the first decline since mid-2008. Today’s data adds to signs that, not only has growth returned in the fourth quarter, but that the Bank of England will have little reason to expand bond purchases at their February meeting. However, comments coming from the BoE’s monetary minutes were a little less assuring. The committee noted that members expect inflation to continuously fall below targets. Even as yesterday’s report showed that prices rose at the fastest rate on record, there is still concern that inflation will continue to slump. In a conference, the BoE’s Mervyn King noted that recent data represents an anomaly and that the jump in prices should be temporary. Former BoE member David Blanchflower went a step further, cautioning that deflation will be the country’s biggest threat going forward. The minutes also noted that they expect the fourth quarter will show growth but at a slow rate. Money Supply and Public Finances figures are set for release tomorrow.
USD/CAD: CONSUMER PRICES HELP PUSH LOONIE LOWER
All of the commodity currencies came under pressure today as concerns over China and the largest plunge in Gold in a month takes its toll on risk tolerance. The Canadian Dollar fell at the fastest rate in about three months as consumer prices fail to reach expectations. Prices for the month of December actually fell by 0.3% after rising 0.5% last month. The data provides evidence that Mark Carney’s promise to keep rates low until the second-half will go unaltered. However, the annualized data was a bit hotter on the month, rising to 1.3%. Manufacturing Sales also played a part in today’s selloff, coming in at 0.1% versus expectations of 1.4%. The Australian dollar was pushed lower on concerns that China is accelerating efforts to restrict credit and tighten monetary policy. The result could mean lower demand for Australian exports in the long-run as businesses become unable to continue large commodity purchases. These concerns were exacerbated on speculation the government asked banks to cut off lending completely for this month. Meanwhile, Australia’s Westpac Consumer Confidence was much better, rising to 5.6% from the -3.8% reported previously. The kiwi dropped at the fastest pace in about a month as Consumer Prices fail to indicate that the pace to raise rates will be rushed. Prices fell by 0.2% in the fourth quarter, after rising 1.3% in the third. However, the effects on the tightening timeline may be overstated since the decline was in-line with RBNZ predictions from their last meeting. Also, both business PMI and retail sales beat expectations, paving the way for a rate hike by the RBNZ.
USD/JPY: GIVES UP LITTLE AGAINST THE DOLLAR
Despite the strong demand for dollars, USD/JPY has failed to stage a meaningful rally, indicating that risk aversion is driving demand for dollars. The Yen largely reaped the benefits of its safe haven status gaining against all major currencies except the dollar, reaping significant rewards against the euro which has fallen for five straight trading days. Nevertheless, today’s economic data was a bit disappointing. The Tertiary Industry Index, which tracks spending in the services industry, contracted by 0.2%. This index confirms that recent drops in consumer confidence have curtailed spending and, since it comprises more than 60% of economic activity, suggests that growth may be slow at best in coming quarters. On a positive note, we saw that the final release on Machine Tool Orders increased to 63.4%. In addition, the decline in Convenience Store Sales slowed to -5.5% from last month’s -6.3%. Economic data scheduled for tomorrow includes the Leading and Coincident index.
May The Force Be With You.
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