By Andrew Timothy Robinson FX-specialist, Market Strategist, Saxo Bank
Risk aversion features again in Asia: spillover from Friday
Weekend press from UK seems to lack positives
MAJOR HEADLINES – PREVIOUS SESSION
- US Aug. Net Long-term TIC Flows out at $28.6b vs. $30.0b expected and $15.3b prior
- US Sep. Industrial production out at +0.7% vs. +0.2% expected and revised +1.2% prior
- US Sep. Capacity utilization out at 70.5% vs. 69.8% expected and revised 69.9% prior
- US Oct Univ. of Michigan Sentiment out at 69.4 vs. 73.1 expected and 73.5 prior
- UK Oct. Rightmove House Prices out at +2.8% m/m, +0.2% y/y vs. +0.6%/-1.5% prior resp.
- JP Sep. Nationwide Dept. Store Sales out at -7.8% y/y vs. -8.8% prior
- JP Sep. Tokyo Dept. Store Sales out at -10.5% y/y vs. -10.3% prior
THEMES TO WATCH – UPCOMING SESSION
(All times GMT)
- HK Unemployment (0830)
- CA Int’l Securities Transactions (1230)
- US Fed’s Bernanke to speak (1500)
- US NAHB Housing Market Index (1700)
Market Comments:
Friday’s US data and Q3 earnings reports probably gave us a timely reminder of how fragile and patchy the economic rebound really is and markets tended to favour the “risk-off” trade heading into the weekend. While the industrial production and capacity utilization data looked solid on the headline, the current need to adjust numbers for the impact of the one-off cash-for-clunkers vehicle sales. In essence, the improvement of +0.7% was only +0.4% ex-vehicles, and still showed a 6.1% year-on-year decline. The preliminary University of Michigan confidence index was also significantly lower coming in at 69.4 versus 73.1 expected and 73.5 last. On the Q3 earnings front, Bank of America cast a cloud over earlier more-buoyant results when it revealed a larger-than-expected loss of rising consumer defaults.
China was hitting the headlines on Friday, and over the weekend, as the US Treasury highlighted that China’s piling up of foreign reserves threatened to slow the correction of global imbalances, though again fell short of branding the Chinese authorities as a currency manipulator. Similar thoughts seem to be surfacing again in Europe as well with the head of euro-zone finance ministers Jean-Claude Juncker announcing that he, ECB chief Trichet and EU Monetary Affairs Commissioner Almunia would travel to China before year-end to discuss the Yuan’s exchange rate. A similar visit went ahead in November 2007 where the EU plead for a faster appreciation of the Yuan, a plea that was rejected at the time by Premier Wen Jiabao.
Meanwhile on the China economic front, various officials have been more upbeat about the recovery. The chief economist at the National Bureau of Statistics said that China’s V-shaped recovery could extend into next year. An official from the National Development and Reform Commission also said that China would have no difficulty in reaching the 8% official target for the full year 2009, having already reached 7% in the first 9 months of the year.
As Asia started the week’s trading, traders were confronted by a number of weekend press articles that seemed to suggest the current risk aversion theme, and with it the retracement of some of the more spectacular currencies (AUD, EUR and GBP), would continue for a while. The AUD, a victim of the dollar’s rebound on Friday, came under more pressure after an editorial piece in the Australian Financial Review suggested the markets had misinterpreted the recent hawkish comments from RBA Governor Stevens and that the RBA was likely to wait to see the data before deciding on a November hike. The article sought to explain the word “timid” in his comments and suggested that this was more to explain the October hike rather than signal the next series of moves. The early slide in the AUD was tempered somewhat mid-morning when RBA Asst. Governor Lowe said there were reasonable grounds to be optimistic over Australia’s economic prospects in the long-term.
GBP was also seeing some retracement from its recent upswing, and was the fastest moving currency early on. The pound was pressured by articles in the Sunday Times and Telegraph with the former highlighting comments from MPC member Posen. Posen said he was in favour of increasing quantitative easing and was not so concerned about overshooting inflation in the current environment. The QE comments ran contrary to those from BOE’s Fisher and Bean last week, who favoured a “pause and wait-and-see” approach. Additional pressure was piled on by an article in the Telegraph, quoting the Confederation of British Industries who warned that Britain risk a sterling crisis if public finances are not brought under control by 2015-16.
Blog comments by LSE professor Willem Buiter, reported in the FT, have grabbed the attention this morning where he urges the ECB to “get serious” about the strength of the EUR. He outlined that the strength of the EUR is hurting the exporting and import-competing sectors of the Euro-zone leading to an increase in excess capacity and unemployment. EURUSD made it below the 1.4850 mark for the first time in three days during early Asia but bounced soon thereafter. Looks like we need to wait for Europe’s input to determine how deep the correction can go.
Another factor suggesting the dollar’s recovery may have a bit more legs on it came from an opinion piece in Barrons over the weekend. The piece urges the Federal Reserve to stop talking about an exit strategy and start implementing one. It blamed near-zero short-term rates for a surge in stock markets, commodities and the fall in the dollar as financial speculation abounds to the ire of the US’ trading partners and foreign creditors.
Today’s sessions features a barren data slate for Europe for a change and those in the North American session only minor ones. Later in the week we can shift attention to the BOC’s rate announcement (no change in rates but more on currency levels?) on Tuesday and the minutes of the last BOE meeting on Wednesday. UK GDP data on Friday may light another fire under Sterling as it is expected to show the move out of recession with the first positive q/q growth since Q1 2008. Other data points include US PPI, housing starts and building permits Tuesday, Canada retail sales Thursday and Germany’s IFO survey on Friday.
Happy Trading
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