Today’s FX view from IB:
Typically it would be safe to say that an acceleration of growth in mainland China would increase risk taking in general across the globe. However, the resumption of vigorous growth as displayed in data from Beijing today heralds further restrictive measures aimed at calming too hot growth in the economy. The combination of these recent practices in the Chinese State, along with evidence of temperate data at best in Europe, instead highlights the increasing risks in the current environment facing the global economy. As such, events are playing firmly into the hands of the U.S. dollar.
The Chinese government exceeded its 2009 target of 8% growth when it announced an acceleration in fourth quarter growth to 10.7% today. An upward revision to data for the third quarter also ensured the annual data met its target. The PBOC continued to steer rates higher at Thursday’s three month bill auction.
U.S. dollar – The dollar accelerated the gains made earlier in the week and even rose against the other typical risk warning indicator, the Japanese yen. The dollar index rose to its strongest since September after Chinese data showed that strong growth was accompanied by rising inflationary pressures. Weakness in global share prices during the week has also been a dollar supportive factor with U.S. equity indices declining 1.5% on Wednesday in the face of a slew of corporate earnings.
British pound – Sterling weakened dramatically to data showing the worst public sector deficit for the month of December on record, reminding sterling investors the shaky backdrop they face. Still the fiscal health of the economy is a well-known factor. What possibly shook investors more today was the weakness in the reading of the broad M4 monetary aggregate, which slid 1.1% in December for the largest decline on record since records were first kept in 1982. Worries resurfaced that the public is not in a borrowing mood conflict with an earlier in the week unemployment report indicating a surprisingly strong rise in employment. Topping off the negative data was a trade survey from the CBI indicating weakness in factory orders compared to what the market was primed for. Overall it’s been a glum start for sterling as it slipped to as low as $1.6132. In early New York trading it’s subsequently recovered to $1.6162. The pound also surrendered a string of gains against the beleaguered euro, which climbed from a five-month low at 86.51 pence to 87.11 pence.
Euro – As much as the market wants to focus on the fate of the Greek fiscal situation, the ECB and other governments must be singing in their bathtubs at night on the relief a weaker euro is bringing to their economies. Having incessantly vocalized publicly across the Atlantic to let the American authorities know that everyone is in agreement about the benefits of a strong dollar, Eurocrats could have saved their vocal chords had they known that a gentler spat with the government of Greece would serve the same purpose.
The recent weakness in the euro has accelerated and it has few friends at this point. No one can say with any certainty that the situation with Greece will be resolved, nor does anyone seem prepared to offer an olive branch. And as much as politicians from Greece seem willing to take the blame, and as much as the rest of Europe wants to tell them that this is a domestic problem, no one trusts the remedial Greek plan to work. In short, the lack of a workable solution in the event that domestic tax plans fail to reduce the deficit will elevate the risk that European nations must rescue Greece. The bigger the void ahead of us, the less willingness there seems to be to buy the euro. The recent 10-cent decline against the dollar sends this message home.
Today’s PMI reading for the Eurozone came in at 53.6 from 54.2 disappointing expectations of a mild increase. Fears are mounting that the Eurozone’s recovery might stall and while a weaker euro might support the view that it would help growth, it’s easier to sell the euro and watch than it is waiting for evidence of rising growth.
Aussie dollar – The strong Chinese data leaves the Aussie dollar on a knife edge at present. The pace of Chinese expansion benefits the Pacific nation given it is China’s largest trading partner and supplier of various metals and minerals. But the very heated pace of expansion at a time of tepid growth elsewhere in the world maintains the threat of further measures aimed at cooling off the economy, which of course might harm the Australian economy at the margin. The Aussie unit slipped to 90.55 U.S. cents before turning to trade higher on the day where it recently traded at 91.10 cents.
Japanese yen – What would keep the yen rally intact is a broader step up in risk aversion. However, there is no follow through selling of U.S. stocks this morning and domestic Japanese stock prices rose, which has taken upward momentum away from the unit where it’s trading at ¥91.77. Even a weak euro today made gains on the yen where it’s trading at ¥129.19.
Canadian dollar – The Canadian unit is left trying to regain its feet in what’s become a sour patch for commodity-linked currencies. Not helping the situation was Wednesday’s shorter-than-expected inflation reading accompanied by weakness in manufacturing data for November. You must remember that this is now a considerably out-of-date reading and is likely a good excuse for taking pot shots at the Canadian dollar. If you look at the chart of both Canada and Australia you’ll see a similar recovery picture unfolding today as the Canadian rallies off 95.02 cents up to 95.45. A week ago the loonie was trading as high as 97.80 cents to give you a sense of the climate change here.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.