CURRENCIES CALMLY ACCEPT RAMPANT CHINESE GROWTH

By Andrew Wilkinson at IB:

There’s a nice mix of arguments this morning to give rise to conflicting views on today’s currency movements. A slew of healthy data out of China confirmed up to be a rambunctious pup desperate to play in the yard. Moreover the strength of the data raises the stakes in terms of monetary tightening, which helped boost the Japanese yen rise against regional currencies on a risk reversion theme. Yet the yen showed its true colors against both the dollar and euro where rising confidence in a recovery and where growing conviction that the dangers stemming from the Greek episode have passed increased the confidence in both currencies. U.S. and European stock markets are heading lower today after healthy recent performances meaning that the overall risk aversion theme has also been put out in to the back yard along with stray pups.

U.S. Dollar – The major driving force in global market sentiment must stem from the data released by China earlier today in which it is more than clear that the domestic economy is enjoying rude health. On account of data yesterday showing surging exports one can only conclude that the global economy isn’t doing so badly either. Retail sales surged 22% over one year ago while industrial production rose by 13%. New loans, having been a strong bone of contention for the Peoples Bank, rose by 700 billion yuan and more than the 600 billion forecast. However, the previous reading for January was 1390 billion and the control exercised by Chinese banks is quite clear. However, along with data today that showed a 2.7% pace of consumer price inflation it’s clear that investors should prepare for further action from the central bank. Inflation rose to a 16-month high and close to the 3% full-year projection of Premier Wen Jiabao.

Two months ago when this type of data “shocked” the world, investors ran headlong back in to their shells and fully priced in an Armageddon-type scenario in which the necessary measures to slow the pace of growth were discounted to reflect a huge slowdown in global growth. And how wrong they were! Today’s reaction is far-more muted and appears to have adapted to why the Chinese need to keep moving rather than what the worst case might be.

The dollar is therefore mixed and has reversed earlier losses to the euro to stand at $1.3642, while it’s also unchanged against the yen at ¥96.50. Initial weekly jobless claims data is once again shifting in the right direction, although a 6,000 decline underwhelmed predictions of a 9,000 drop. In the big picture a move further to the south side of that half million mark is what the market needs to see from this series.

Euro – Earlier the euro reached $1.3687 to the dollar as a growing chorus of voices attempt to package up the fiscal crisis surrounding Greece and wrap it up with a nice red ribbon. Yesterday’s words from former Italian Prime Minister Prodi continue to resonate and despite new and admittedly scheduled public union strikes across Greece today, the gravity up the media and therefore investor pull towards sovereign debt has eased. The euro has, however, reversed earlier gains against the yen to and now buys ¥123.30. It also eased to 90.82 pence to the pound.

British pound – Rising inflation expectations according to a Bank of England report today have boosted the fortunes of the pound. The survey asks the public for its inflation perceptions one year forward. At the time of the previous report in November the consensus reading was a 2.4% annualized pace of price increases. Today’s report reveals a 2.5% consensus among the public. While it is highly possible that the Bank of England will discount the reading based upon its own analysis, investors today assumed a closer end to easy money and helped fuel a gain for the pound, which rose to $1.5065. After U.S. jobless claims data the pound pared its gains to $1.5014.

Japanese yen – Despite the bullish Chinese data and impact on the Asian region, the need for risk aversion safety remained complicated by a 1% rise in the Nikkei.

Aussie dollar – Another example of conflicting arguments arrived today in the form of the Aussie jobs report. The dollar fell earlier in response to a net 400-employment increase during February yet stands a shade higher at 91.59 U.S. cents in early New York trading. However, the picture is less clear. January data was revised higher while the full-time element of the report showed an increase of 11,400 jobs in February maintaining a sixth straight monthly increase. Interest rate expectations moved sharply higher in response, making the muted currency reaction all the more inexplicable. That said, the Chinese data today argues for further action from the central bank in an effort to tame the economy.

Canadian dollar – Price action on Wednesday did indeed create a huge spike down in the U.S. dollar allowing the Canadian unit to make an eighth consecutive string of gains. Friday brings the Canadian employment report and currently the unit is about unchanged on its midweek close at 97.38 U.S. cents.