Today’s FX View from IB:
A flurry of data indicating that the global recovery is safe in the hands of the Chinese economy helped raise the tone today at the end of a week littered with awkward obstacles. The impact of today’s improved tone has served to weaken demand for dollars and yen. And a soothing affirmation from an executive at ratings agency, Moody’s Investor Services, about the stable prospects for the U.K. and U.S. has scourged the demon from the pound at the end of a difficult week.
But the main story of the day that’s providing the driving force for currency and bond activity belongs to China, where a slew of positive data served to remind investors that its economy is going gangbusters. While it’s not accurate to say that China was unscathed by the financial meltdown, it is true to note that they have emerged quicker than other nations. That’s largely due to a two-year $586 billion government stimulus, which already dragged the pace of growth back to 8.9% for the third quarter.
Although unsurprising, today’s data remains impressive. Bank lending rose and helped lift money supply expansion to a record pace of growth. The M2 measure of broad money surged by 29.7%. Industrial output rose 19.2% year-over-year as the economy sucked in a rising amount of exports, largely raw materials and minerals. Imports jumped by 26.7% while exports dipped by 1.2%. An encouraging sign for those worried about traction associated with the recovery can note that the pace of decline in exports to Europe and America slowed while the pace of demand from Asian nations picked up as exports grew 20.8% within the region.
Production at Chinese steel mills during November has never been as high while power generation rose to a record high. On the consumer side retail sales rose 15.8% year-over-year while consumer prices rose 0.6% making the first increase in 10 months. This week the State Council announced measures to boost consumption through further incentives and liquidity measures in order to boost the economy in a sustainable fashion.
Global stocks rallied on account of today’s glowing scorecard from China. U.S. markets are looking positive ahead of the open. But before then, we’ll learn the results of November’s retail sales report for November, due to show a 0.6% resumption over the Thanksgiving period. Mid-morning investors will learn the latest reading on consumer confidence from the Reuters/University of Michigan sentiment survey.
U.S. dollar – The dollar is once again lower as investors see less need to favor the greenback if risk aversion is once again on the decline. The S&P 500 index is within 10-points of the high for the year and is heading for a third rally in as many days.
Euro – But we shouldn’t ignore the other part of the equation. Undoubtedly the rally in the dollar has grown during a week of woes over possible sovereign downgrades as well as resurgent Middle Eastern fears, but its naissance is found in last week’s employment report. Investors continued to lose faith in the euro throughout the week as fears escalated that more peripheral and satellite nations would face a ratings downgrade and create concern for the future of the single European currency. However, the Fitch downgrade for Greece, the lowering of outlooks from ‘stable’ to ‘negative’ from Standard and Poor’s for Spain and Portugal appear to be the worst of matters for now. The better broad tone instilled by confidence in rising Asian fundamentals has seen the euro add to $1.4771 in early New York trading.
Aussie dollar – The performance of the Aussie dollar is a little surprising today. Undoubtedly the gangbusters performance of its major trading partner has bolstered expectations for further interest rate rises, but it’s had less impact on investors’ appetite for the local dollar. Still, at 91.83 U.S. cents the Aussie is still higher than this time one week ago and is also pushing on a new intraweek high.
Japanese yen – Not much to state on the yen this morning. It remains relatively healthy against the dollar at ¥88.86 although it’s lower on the day. Against the Aussie, Swiss franc, euro and pound it is decidedly lower and again it is the Chinese news that is encouraging investors to flee the relative safety of the yen and try something riskier instead.
British pound – Sterling rallied after an executive from Moody’s followed up a conference call discussing sovereign ratings and from his Singapore office affirmed that neither the U.S. nor U.K were at risk of a ratings outlook change. That came despite the earlier in the week reference by the agency to the perilous state of the burgeoning fiscal deficits of both nations. Each was “pushing the boundaries of its Aaa rating” said Moody’s. Although it has been higher in the European session the pound is currently trading against the dollar at $1.6295 on the relief of the news. Against the yen the pound buys ¥144.72 and one euro buys 90.60 pennies.
Canadian dollar – The dollar trades a little better this morning against the greenback and currently buys 95.29 U.S. cents. Strong resistance has formed at 95.40 on the March future and we’ll be waiting to see whether a rally in equity prices will be strong enough to inspire a commodity rebound, which should help drive at least a challenge to this resistance.
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.