Highlights
The US dollar is mixed against the major and emerging market currencies. The euro is consolidating in yesterday’s range as bonds stabilize and despite a smaller than expected German trade surplus. Comments from EU spokesperson Altafaj just before the NY open that measures taken by Greece are sufficient have so far failed to take the currency above yesterday’s high around $1.3635. By contrast, the pound came under further pressure extending losses against both the dollar and the euro overnight, hit by another round of weak data (industrial and manufacturing production.) While the currency was oversold and has managed to recovery some modest ground, gains are likely to be limited with resistance around $1.4980 and support on the cross at around 0.9080. The New Zealand dollar is one of the top performing currencies today on position squaring ahead of this afternoon’s RBNZ meeting. The central bank is expected to leave rates unchanged but the market will be looking for any signals about the timing of the first hike. Recent data have been mixed and given that households remain cautious and employment has softened, the RBNZ may leave its statement unchanged, a negative for the kiwi. Amongst emerging market currencies, the Asian countries, many of whom export to China, saw their currencies gain after Chinese imports jumped.
Global equity markets are firmer but with several exceptions. In Asia, Japan’s Nikkei and Topix closed down (a modest -0.04% and -0.2% dragged lower by declines in energy related and tech shares. China’s Shanghai Composite also slipped, down 0.7% as consumer related shares fell amidst concern rising exports and inflation (due in the next few days) could lead to tightening and despite reassurances from the Commerce Dept that stimulative fiscal policies will remain in place. Most other Asian markets as well as the European bourses have posted modest gains while early indications suggest US markets may open flat. The MSCI Emerging Markets index is up 0.5% today and is now up on the year.
Global sovereign bonds are narrowly mixed. In Europe, the German 2- and 10-year yields are up just 1 to 2 bp after successful 2- and 10-year auctions totaling 7 bln euros. The comparable Greek yield is down 3 bp while Portuguese yields are down 2 bp. Portugal’s 11-year 990 mln euro bond auction, like the German auctions, also saw good demand.
Currency Markets
The British pound’s poor performance in the European session was exacerbated by worse than expected Jan industrial production data. Output contracted -0.4% m/m (vs. an expected gain of 0.3% and after a 0.5% gain in Dec) leaving the yearly rate well in negative territory, at -1.5% (vs -3.6% in Dec.) Manufacturing production also contracted unexpectedly by -0.9% m/m (vs +0.9% prior) and for a yearly rate at a very sluggish +0.2% (from -2.0% in Dec). Poor weather contributed to the disappointing performance, but it is not all due to weather. Yesterday’s Jan trade figures (and considering the highly manufacturing orientated nature of the UK external sector) hinted at a likely disappointment on the industrial production front too. Moreover, it should be noted that the French Jan industrial production also released this morning came out on the strong side of expectations (at +1.6% m/m) yet the weather conditions were dreadful in France too in January. The bottom line is the UK economy has started the year on a poor note and this has implications for both the monetary policy outlook (i.e. extra QE could be considered again) and for the fiscal prospects (the weaker growth profile means lower growth generated revenues and a deteriorating fiscal position), risking exacerbation of current UK credit concerns.
China reported stronger export and import figures for February than expected, with the net result of a smaller than expected trade surplus. In fact, February’s trade surplus of $7.6 bln is the smallest in a year and a bit more than half of the January surplus. This is consistent, however, with an under-appreciated development that we think is important. In terms of global imbalances, the US trade deficit and the Chinese trade surplus have been roughly halved as a percentage of GDP over the last couple of years. In the US case, it seems largely cyclical and the growth differentials that we expected to close the output gap in the US before Europe and Japan will likely see the US trade deficit grow again, though from a lower base. In China’s case, the possibility of a structural shift is greater, though too early to tell. China’s exports rose 45.7% in February from the depressed year-ago levels. Yet this is more than twice the pace in January and may also have been distorted by the earlier lunar New Year. Imports jumped almost 45%, better than the 39.7% expectations, but well off the mind-boggling 85.5% pace reported in January. There are several implications of today’s Chinese trade report. First, with foreign demand improving and domestic demand still appearing robust, it can only add to the near-term inflation pressures. CPI figures are due out as early as tomorrow and the expected 2.5% year-over-year pace would be the fastest pace in 16 months and spur the already growing expectation for a PBOC rate hike. In this regard, note that China reported that commercial and residential real estate in 70 cities rose at an almost 11% clip, which plays on fears of over-heating. Second, although the US Congress is seeking action to try to pressure China into allowing its currency to appreciate, the decline in China’s trade surplus makes it all the more difficult for the Obama Administration to cite China as a currency market manipulator in next month’s Treasury report. There has been some speculation that China would be cited as the Obama Administration seeks to pre-empt Congressional action and seeks to get support for some of the outstanding free trade agreements. Some observers note the weapon sales to Taiwan, the Dalai Lama visit to Washington and the trade frictions all as signs that the Administration is edging toward a more direct confrontation with China. Meanwhile, the 12-month non-deliverable forwards are fairly stable today, ahead of more macro economic data; implying almost a 3% appreciation of the yuan over the next year. We suspect that a rate hike is still several months, with additional administrative moves, like the increase in reserve requirements and tweaking money market rates, continuing to be seen first.
Japan’s economy may be benefiting from the revival in its neighboring Asian economies, but domestic demand remains very sluggish and deflationary forces continue. Feb machinery orders were softer than expected at down 3.7% m/m (vs +20.1% in Dec.) That put the yearly rate at -1.1% (vs -0.6% exp). Machinery orders are a good proxy for business investment, so this disappointing January performance is not particularly promising for Q1GDP.
Upcoming Economic Releases
US Jan wholesale inventories, which represent about a quarter of business inventories, are due at 10AM EDT/15:00 (0.2% m/m exp vs. -0.8% prior.) The RBNZ announces its policy decision at 3PM EDT/20:00 GMT (rate expected unchanged at 2.5%.)
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The preceding is a post by Marc Chandler, global head of Brown Brother Harriman’s top ranked Currency Strategy Team. For more of BBH’s currency views, please visit the BBH FX website here.
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