China’s reserve diversification hits the headlines again and dictates FX sentiment
MAJOR HEADLINES – PREVIOUS SESSION
- US Sep. Existing Home Sales out at 5.57m vs. 5.35m expected and revised 5.09m prior
- US Sep. Existing Home Sales out at +9.4% m/m vs. +4.9% expected and revised -2.9% prior
- AU Q3 PPI out at +0.1% q/q, +0.2% y/y vs. +0.3%/+0.5% expected and -0.8%/+2.1% prior resp.
- SI Sep. Industrial Production out at -7.7% y/y vs. +1.0% expected and revised +11.8% prior
THEMES TO WATCH – UPCOMING SESSION
(All times GMT)
- GE GfK Consumer Confidence (0700)
- Sweden Trade Balance (0830)
- UK BOE Report on Asset Purchase Facility (0930)
- US Chicago Fed Nat'l. Activity Index (1230)
- CA BOC’s Carney to speak (1255)
- USD Dallas Fed Manufacturing Activity (1430)
Market Comments:
GBP was whacked mightily on Friday after all the hopes that the UK might finally show the first positive growth since Q1 2008 in Q 3 were dashed. GDP came in at -0.4% q/q versus an expected +0.2% and forced a sharp liquidation of GBP longs that had been riding the wave of GBP’s appreciation. The fact that the economy could not even manage positive growth despite unprecedented stimulus from UK authorities, and a weak pound that should have helped manufacturers price goods more competitively, was an extremely disappointing factor and will likely keep GBP capped near-term as talk of additional QE measures is reignited. PM Brown commented that it would be “suicidal” to abandon the measures in place to stimulate the economy in the wake of the data, which confirmed the UK was in the throes of the worst recession on record since data was collected in 1955.
Elsewhere, US data was better than forecast, with existing home sales surging 9.4% m/m in September though it was noted that this is likely heavily influenced by first-time buyers rushing to take advantage of the tax credit scheme that is due to expire on December 1. Despite the data, and more Q3 earnings that beat forecasts, Wall St finished the week on a soft note and we expected Asia to carry on this tone at the start of a new week. Weekend headlines also reminded us of the spectre of the commercial real estate sector with Capmark Financial filing for bankruptcy protection, while a possible resurgence in the H1N1 virus as the West enters into winter also grabbed the attention.
Indeed, this weaker risk appetite theme seemed to dominate the start of the week, with early activity benefitting the USD to the detriment of GBP, EUR and AUD. However, some mid-morning comments/reports from China changed the mood. First off, we had headlines detailing a report that recommended China raise the proportion of Euro and Yen in its reserves while reducing the proportion held in USD. This was immediately followed by comments from Chinese Vice Premier Li Keqiang who said the China economic recovery is now solid and the market associated both sets of headlines with the Vice premier. However, it transpired the reserves report came from PBOC researcher Zhou Hai, who subsequently clarified that the views were “purely personal” and not a reflection of policy. Nevertheless, the damage had been done and the USD was immediately on the back foot and USDJPY pummeled, though the EURUSD rally stalled shortly after printing a new 14-month high.
EUR bulls had also been given further ammunition to test for new highs after ECB’s Noyer, speaking at a forum in Singapore, made no comment of the level of the EURUSD. Coming on the back of EU Alumunia’s comment Friday that EUR strength is not a big risk, and EUR’s time below 1.50 was already limited.
With the RBNZ meeting later in the week now in immediate focus, weekend comments from NZ PM John Key may take on more significance. He was upbeat on the economy, saying growing demand for NZ’s commodities should help it avoid a double-dip recession and expects GDP to improve over Q3 and be “much stronger” in Q4. However, he added that NZ was unlikely to face any upwards pressure on interest rates until mid-2010 at the earliest. With the market already pricing in rate hikes by Q1 2010 and expecting the RBNZ to shift to a more neutral bias at Thursday’s meeting, we may see some activity in NZ markets early tomorrow when they return after a long weekend.
The reaction to the news in Asia may have been exaggerated due to liquidity issues as Hong Kong centre was also absent, and may explain why the move stalled after a while. There is little on the data front today to excite, with German consumer confidence and Swedish trade data to consider. The BOE’s report of its Asset Purchase Facility may grab more attention, especially following Friday’s GDP data and its implications for QE. The US session sees Chicago Fed activity for September closely followed by the Dallas Fed release for October.
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