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Chinese exports drop as UK recovery gathers momentum

We start this week after a very volatile week for the currency markets.
Chinese exports drop as UK recovery gathers momentum
The US Dollar lost most of it gains after ADP job forecasts came out much lower than expected as well as poor manufacturing numbers earlier in the week.

However, the non-farm payrolls number that was out on Friday, came at a reading of 175k which was much better than expected.

That helped the Dollar claw back some of its losses against most currencies, specifically commodity backed currencies, which have amidst the commodity selloff, lost heavily.

The USD/JPY pair has been the most volatile as it has moved along a 7 percent range in the week.

The Yen clawed its way back under the 100 mark earlier in the week after Prime Minister Abe’s speech that outlined strategies for investors painting a rosy picture, which managed to provide the Yen with some support, though not so for the free falling Japanese equity markets.

The non- farm payroll numbers from the US, though positive, were revised downwards by 12k which adjusted the unemployment rate by 0.1% which now stands at 7.6%.

This has kept the greenback weak and under pressure from most of it’s counterparts in opening trade.

With mixed figures coming out of the US, investors are now less inclined to continue with the sentiment of the Fed cutting back stimulus in the near future, as markets price in the over-reaction to Bernanke’s announcement that the Fed will ease its asset buying programme measures as soon as July.

Last week was also a very positive one for the Euro, on the contrary, as it surged to a 3 week high and the EUR/USD pair trades at 1.32 this morning.

The ECB met on their usual meeting on Thursday and kept rates on hold and revealed a promising outlook on growth forecasts for the region.

Despite weak manufacturing numbers earlier in the week, the ECB decided not to proceed with any plans of negative deposit rates. We had German industrial production figures out on Friday which also came in better than expected, in the wake of which Angela Merkel has urged the rest of the Euro zone to ‘follow Germany’s lead on growth’.

Meanwhile, European stock futures have fallen amidst China’s export figures that sank to a 10 month low in May as a crackdown on fake trade invoices exposed weakness in global demand.

Wise money markets buoyed by data releases

A combination of better than expected Chinese export growth and German Industrial production has boosted appetite in the markets and led to euro/ US Dollar driving higher yesterday.
Wise money markets buoyed by data releases
In addition overnight it has been confirmed that Australian employment data came in hugely better than expected again boosting risk appetite and leading to gains in the AUS Dollar in early trade.

In other news the NZ Dollar fell after the central bank confirmed that they intervened last month to protect the NZD from further appreciation.

However with interest rates still high compared to the west at 2.5% and limited ability to intervene on a large scale the NZD is not expected to depreciate too much but the move will make speculators think twice before going long NZD.

Elsewhere the Polish Zloty gained ground after the central bank cut interest rates in a surprise move to try to boost growth.

The focus for today will be on the Bank Of England interest rate decision, however it is not expected that we will see any change to interest rates or to QE which will hold at £375 billion.

The recent uptick in economic data in the UK through PMI and GDP coming in better than expected underlines the reasoning to hold firm.

We also have industrial and manufacturing production data due out of the UK this morning which is expected to be weaker than previous releases. From Europe we have the ECB monthly report which although not likely to surprise will be eyed just in case and finally we have US jobless claims which are expected to show an increase in claims.

Gold plummets

A disappointing day for risk assets yesterday threatens to advance further.
Gold plummetsWeaker than expected data from China and the US dragged on market sentiment supporting the theory that the worldwide economy is repeating the pattern of Q1 strength followed by weakness over the remainder of the year.

Growth fears aided to worsen the drop in gold prices with the valuable metal plummeting by 15.5% this month alone whilst weighing heavily on other commodity prices.

Data releases today include CPI inflation in the US, Eurozone and UK alongside the German ZEW investor confidence survey, US industrial production and housing starts.

The Eurogroup and Ecofin statement of an extension of Irish and Portuguese loans and the disclosure that Cyprus will need even more funds than previous estimates (EUR 23 billion compared to EUR 17.5 billion previously) has been taken in its stride by markets.

Given market sensitivity to weak data any discontent will strengthen the risk off tone but this appears doubtful as the data overall is expected to be somewhat healthier.

The Aussie was struck by weaker Chinese data releases and worsening in risk appetite.

While the drop has been sharp over recent days Australian Dollar is unlikely to fall much more, with an abundance and sufficient appetite for the currency around 1.0300. Nevertheless, AUD/USD has dropped below its 100 day moving average level 1.0414 – a breach of which threatens to mark a stronger downward move.

Finally, UK Inflation is expected to rise another 2.8% in March and persistent price growth may increase the demand for Sterling as it diminishes the Bank of England’s (BoE) space to expand on QE.

As the central bank expects a slow but sustainable recovery in Britain, above-target inflation should keep the MPC on the side-lines, and we may see a growing number of BoE officials adopt a more neutral to hawkish tone for monetary policy as the Funding for Lending Scheme continues to work its way through the real economy.

Risk appetite is back on the menu

Risk sentiment remains buoyant following the aggressive easing by the Bank of Japan (BOJ) which the market is now pricing in as a move into risk.Risk appetite is back on the menuAsian markets and equities continue to rally and we are also seeing a follow through into gains in commodity currencies and US Dollar weakness.

The GBP/USD exchange rate has managed to squeeze higher still on this momentum and EUR/USD is also looking healthier.

Yesterday we had the FOMC minutes which through a slip up were actually leaked earlier than expected.

The minutes suggest a slightly more hawkish tone than what is being followed through by the FED in policy actions, however the markets shrugged off this tone believing the FED will continue to stick to its asset purchases at a rate of $85 billion per month through to year end.

On Friday we have US retail sales which is expected to show that consumer spending is softening in response to higher taxes and lower disposable income- if so this would support the FED keeping their foot on the QE pedal.

Yesterday Chinese data was also supportive for a move into risk as China announced mild trade deficit which to some extent dispels concerns of a weak domestic demand.

In addition outlook in China was supported by a tempering in inflation confirmed in the inflation report easing pressure for monetary tightening.

In the currency markets all eyes are watching US Dollar/JP Yen which is testing the key level of 100.

So far it has failed to breach it and remains a key psychological barrier which if exceeded would demonstrate the effectiveness of the BOJ policy in relation to depreciating the Yen.

Elsewhere we do not have any major data releases and the markets will continue to look to maintain the move into risk.

Retail sales figures boost UK economy

UK retail sales rose at their fastest rate since 2009 in February, as the improved weather enticed spenders back to the High Street.Retail sales figures boost UK economyThe British Retail Consortium (BRC) said like-for-like retail sales were up 2.7% on the previous year and attributed the result from demand on electrical goods on the High Street.

The data will provide a welcome relief to retailers, following a run of disappointing figures for the UK leading to speculation of a triple dip recession.

“February saw growth across all parts of retailing, with big-ticket goods and items for the home recovering particularly well” according to Helen Dickinson of the BRC.

Sterling is trading higher this morning with Cable up at 1.5143 and 1.1603 against the Euro.

Overnight China kept their economic growth target the same at 7.5% as it looks to grow at a steady pace and maintain social stability whilst setting a new lower inflation target of 3.5%.

China has suffered in recent years following falls in both global and domestic demand and last year posted its worst performance in 13 years. This is a cause for concern not only within China where analysts say a fast pace of growth is needed to create jobs, but also for the rest of the world which depend on China to drive the global economy.

Coupled with growth worries China has struggled to keep consumer goods and property affordable. The property market in particular has seen prices sky-rocket from both domestic and international investors looking to gain from the rise.

The Reserve Bank of Australia (RBA) maintained rates at 3% for a second straight month. The overall global outlook continues to improve and a survey of the Australian miners’ investment plans suggested last week the natural resource boom would continue for longer than originally thought.

The RBA result comes alongside the ongoing discussion about whether the central bank should attempt to limit the AUD’s rise. The Aussie rose by a fifth of a US cent after the announcement, reaching $US1.0233, up from $US1.0212.

All Eyes will be on growth Australian GDP numbers tomorrow where a healthy 3% growth Year on Year is expected.

Euro strengthens on positive Chinese economic output

Equities across Europe have started strong this morning for a fourth consecutive day following positive signs that China’s manufacturing is improving.Euro strengthens on positive Chinese economic outputThe release overnight signals the first expansion in China’s factory output in 13 months and boosted optimism that growth in the world’s second largest economy is on the road to recovery after a seven quarter slowdown.

The initial reading was 50.4 for a Chinese purchasing managers’ index released today by HSBC Holdings Plc and Markit Economics and falls above the last reading of 49.5 in October. A reading above 50 indicates growth.

A recovery in manufacturing would support prospects for a continued pickup in economic growth that slowed last quarter to the weakest pace in more than three years.

Over to Europe and data tomorrow will indicate modest growth in Germany and the euro area, as leaders of the 27 EU nations gather for negotiations in Brussels.

Today we have a Spanish bond sale (€3.5 billion) maturing in 2015, 2017 and 2021 today.

The euro rose 0.23 percent to $1.2865 after earlier touching $1.2868, the highest since early November.

European politicians who are squabbling over Greece, the destiny of the euro, banking amalgamation and EU development need to reach agreement on a proposed $1.3 trillion package lasting until 2014.

The euro debt crisis and a deadlock over Greek aid raise the stakes for the talks, testing whether the bloc is heading for more integration.

Yesterday the Bank of England minutes were released revealing an 8-1 split on maintaining quantitative easing at £375 billion as David Miles sought an increase of £25 billion.

This comes in the wake of inflation being much higher than forecast than the targets that are set out by the BOE, for the next 2 years.

Eight members of the MPC decided that upholding the size of the asset purchase programme was appropriate.

Furthermore, the committee voted unanimously to keep its key lending rate at a record low 0.5%.

As for the rest of the day, we have the US Thanksgiving bank holiday so the headline calendar looks light.

Rollercoaster growth for UK economy

Yesterday the Bank of England further downgraded the UK’s growth forecast and warned that the economy will continue a rollercoaster pattern of recovery. Rollercoaster growth for UK economyThe key takeout from the Bank of England report is that the UK economy is still under pressure both from rising inflation and forecasts of low growth- both of which are Sterling negative.

In addition Mervyn King maintained the central banks confidence in asset purchases and did not rule out further QE moving forward.

The Pound fell against the US Dollar and the euro yesterday and continues to look weak this morning.

Elsewhere we have seen GDP data for Germany France and Spain this morning.

The German and French economies managed slight growth in Q3 but not surprisingly Spain’s economy shrank by 0.3% in the third quarter and this follows a 0.4% contraction in the second quarter.

Italian GDP has also come in negative at -0.2% which is weak but not as weak as expected.

The flurry of GDP data is not encouraging for European growth and should weigh further on the euro.

The Japanese Yen has started to show some signs of weakness after prime minister Yoshihiko Noda said he was set to dissolve parliament and hold a snap election.

The opposition are calling for aggressive monetary easing by the BOJ to assist the economy and devalue the Yen.

This is leading to some selling pressure on the Yen as the election is likely to be a close call.

Elsewhere Xi Jinping has been officially appointed as the new general secretary of the ruling communist party in China succeeding Hu Jintao.

We expect the weak and uncertain sentiment to continue as the markets continue to slowly to price in the fiscal cliff risks, as we sit this is largely USD positive in line with risk aversion.

UK inflation rate set to rise again

Following the US bank holiday and strong Chinese data over the weekend, risk aversion appeared to be receding overnight, no doubt supported by lighter trading volumes to help this sentiment.UK inflation rate set to rise againThe slow return to risk did nothing to reduce support for the Greenback which remains well backed and so far showing little sign of reversing this trend.

The Eurogroup meeting yesterday produced no arrangement to provide Greece its next loan tranche but this came as no surprise.

In the US there appeared to be some progress towards deciding the fiscal cliff, with a Senior Republican economist signifying that Congress should agree on higher taxes for the rich ahead of official negotiations on avoiding the fiscal beginning on Friday.

The euro/US Dollar’s fall has been relentless and looks set to test its 100 day moving average level around 1.2639.

It’s weakness can be blamed on by the usual suspects, namely uncertainty surrounding Greece and Spain.

We may see a switch in sentiment following a small rise in the German ZEW investor confidence expectations index but it will be insufficient to turn the euro around in the short term.

Back to the UK and data has been poor to say the least and comprises a series of disappointments through November including manufacturing confidence, construction confidence, industrial production and retail sales.

The Monetary Policy Committee did not deliver on any further policy easing at its meeting last week and clues to further policy moves as well as GBP direction will emerge from a slate of data over coming days.

However these figures may not bode well for Sterling.

October CPI Inflation today is set to expose an increase while retail sales are likely to have fallen over the same period.

Money markets are watching for tomorrow’s quarterly inflation report and this will see upward revisions to short term inflation forecasts while we still see scope for more QE early in the new year.

GB Pound will find little support from the data or the QIR leaving the currency unprotected to further decline against a relatively firm US Dollar and a resumption of weakness against the EUR.

Obama has a narrow lead in USA presidential election

Money market traders will be preoccupied by today’s US Presidential election and Thursday’s handover of leadership in China.Obama has a narrow lead in USA presidential electionThe US Dollar appears to be rallying in spite of a narrow lead in the polls by President Obama.

The general view is that a Romney win would be US Dollar positive given that it may imply a more restrictive Fed in the form of less QE but the USD appears to be ignoring such polls.

The single European currency is the weakest performing currency so far this month after the Swiss Franc.

Greek and Spanish fears are mounting pressure on the euro- the former due to tomorrow’s vote on austerity procedures and the latter due to worsening economic data and a lack of traction towards requesting a bailout and therefore triggering the ECB’s bond purchase program.

If we look to the bond markets, a switch in Germany 2 year bond yields have turned negative, producing a widening US yield gain and in turn a weaker EUR/USD.

Certainly, the relationship across 2 year US – German yield differentials is very high, suggesting that the EUR will struggle below its 200 day moving average around 1.2828 until German yields move higher.

A generally firmer US Dollar has also dealt a blow to Sterling, with the currency slipping below 1.60.

This decline was supported yesterday by poor service activity in the UK which increased at the slowest pace since a temporary decline in activity nearly two years ago.

The PMI Index for services in October fell to 50.6 from the prior month’s 52.2 PMI, lower than the expected 52.0.

The number is a reminder that despite the recent strong GDP number the UK still has problems within manufacturing and service industry.

Therefore attention will return to the Bank of England decision on Thursday, where the decision will be a close call but there is a possibility of an additional GBP 25 billion in asset purchases could be announced.

Sterling could encounter some problems in this event but given that the currency has not been particularly impacted from QE in the past, it is unlikely it will suffer any severe setbacks.

US Dollar rallies on bad Chinese data

We had interesting trade overnight with the release of the Chinese PMI Manufacturing at 47.8 vs 47.6 last month. US Dollar rallies on bad Chinese dataAlthough it has shown a small increase month on month it is painfully evident that growth is still lagging behind in the economy as the policy makers are still keeping the brakes on any further monetary easing.

This was the 11 month in a row of a negative growth figure for the sector.

Although new orders have increased which could still point to stabilisation in the sector.

The euro has been shedding investors this morning with the sentiment regarding Spain’s lack of willingness to request aid from the ECB’s new short-dated bond buying plan weighing down.

Also it has been reported that Greece is in the process of selling assets such as embassies, islands, palaces, airports to meet the final €2 billion of Troika cuts that are required before they receive the next tranche of aid.

Yesterday’s Existing Home sales from the US were better then the consensus coming in at 4.82 million which is the strongest result for two years and with the Fed announcing further QE last week should only get stronger in the coming months.

We had UK retail figures this morning which was expected to show a -.4% fall but came in at slightly better at -.2%, which is still a contraction and will only heighten calls for the BoE to increase the Monetary Easing further.

This worsening picture of the UK economy appears to show the grip of the double dip decision could be spiralling out of control with extreme measures still not aiding the recovery.