Financial Advisor

FX Update: China hikes, risk wilts

Risk appetite is pulling back after a lousy earning report and outlook from Apple Computer late yesterday and a surprise decision to raise rates by the PBOC.  Meanwhile, US banks report great results as mortgage clouds continue to gather.  Risk trades at risk here…
A hike in China
The PBOC’s decision to hike rates has served as a bit of a spanner in the works for the current market paradigm of “Easy money all around – let’s speculate wantonly!”. This is the first move by the PBOC since….2007 and suggests that the Chinese are very concerned about something here since they are willing to rock the boat in this fashion. The speculation can only be that CPI will come in very high when China releases a raft of data on Thursday. Food prices are weighted very heavily in the Chinese CPI, and grain prices are sharply higher from just a couple of months ago. This is a critical political season in China, as it sets about crafting its new 5-year plan for 2011-15 (let’s all remember that this is a command economy…). 8-10% growth forever, anyone? Forever might end within the next 12 months. While the reaction in the Chinese equity market to the PBOC hike suggests no domestic panic in China, any whiff of anything resembling a pulling of the plug on the liquidity-fest is anathema to the competitive devaluation/QE front-running theme and the market shrinking away from risk trades at the moment makes eminent sense and may have longer to run.
RBA Minutes
The RBA minutes were relatively Aussie negative, especially since the currency’s strength was mentioned as a factor in the outlook as a potential aid in easing inflation going forward. This sets up the dynamic  of: too much strength in the Aussie means the RBA is less likely to hike, which means that the AUD uptrend from here on out will be a self-limiting process, meaning downside becomes the side of least resistance in terms of volatility potential. It was also noted in the minutes that the decision was “finely balanced”. This combined with the Chinese rate hike aimed at slowing the Chinese economy has the Aussie in the hot seat for a very good reason today.
Chart: AUDUSD
The news flow today not kind to the Aussie, which could fall across the board on today’s developments. The big focus to the downside here could be the old 0.9400+ high if momentum continues in the short term.
US Housing Surprise?
Interesting to note that despite the new mortgage fiasco in the US, the NAHB survey out yesterday, which measures buyer interest for new homes and is one of the more leading indicators in the US housing market, actually ticked a few points higher in September from its lowest level in a long time in Augus. One might take this as an encouraging sign, but to some measure it is likely also due to the fading effect from the expiration of the homebuying incentive tax that ran out at the end of April and cannibalized forward demand. One might also thing that new homes might sell better in the coming few months than existing homes for those who feel they absolutely must buy a house because they are moving, but don’t want to risk the potential title/ownership hassle of an existing home. At least new homes have a clear title! The other housing related data today was actually less encouraging, as housing starts were about the same as the previous month and building permits dipped sharply. The 539k annualized in the latter figure is the third lowest figure on record.
Bank of Canada
Despite the sharp move weaker in CAD ahead of the BoC decision today, the decision itself failed to throw the currency a rope as USD selling has intensified this morning. The Bank’s statement was cautious as the Bank noted the shift to fiscal consolidation in the developed countries, where it felt growth would be weaker. Canada’s growth potential was also downgraded and the bank also expected household spending to decelerate. All in all, no major surprises, but this is clearly not a bank that is looking to hike any time soon and one would expect the market to reduce forward rate expectations to closer to neutral. Considering the news flow of the day here and the relatively large shock to the AUD uptrend from developments – one has to wonder how long AUDCAD can maintain the parity level here.
Earnings season
Perhaps the US equity market’s most important equity, Apple Computer, fell sharply overnight after earnings somewhat disappointed expectations and as product sales and margins disappointed. A cautious outlook didn’t help. This is important stuff, coming from the market’s poster child of a growth stock and a USD 275 billion company.. This morning’s focus was on Goldman Sachs’ and Bank of America’s earnings – who of course reported great results – but the latter company is at the center of the mortgage furor due to its overtaking of the most reviled mortgage lender (due to their aggressiveness in the sub-prime area and size), Countrywide Financial, in early 2008.
Looking ahead
At what point does he shut down of an entire large nation affect the Euro? Shouldn’t it be soon? And if the USD is doing well here on this consolidation in risk appetite, shouldn’t its fellow traveler the pound also be doing well? For those not wanting to read between the lines, we will simply come right out and say it: why is EURGBP trading at 0.8800 right now – shouldn’t 0.8700 be more appropriate, or even lower at the moment? It appears that the focus is definitely away from GBP at the moment as the USD is the prime mover here.
It appears that this PBOC rate hike, US mortgage situation and the bit taken out of Apple might finally be enough to trigger a reasonable consolidation of this Everything Up/US Dollar Down trade for at least a time. if momentum continues to increase here in the short term on the anti-trend will be the 1.3350 area in EURUSD and the 0.9400 area in AUDUSD. Those levels might appear rather far off, but the April top in risk appetite and subsequent May fall-out showed us what can happen when these persistent moves with virtually no retracements can mean when the downside finally does arrive in a hyper-correlated market.
Interesting to note that the USD strength is unfazed here just after the Fed’s Lockhart is out saying that the Fed needs to get big on QE if it wants to do it at all. 
Economic Data Highlights
  • EuroZone Aug. Current Account out at -7.5B vs. -4.1B in Jul.
  • EuroZone Aug. Construction Output out at -8.5% YoY vs. -6.9% YoY in Jul.
  • Germany  Oct. ZEW Survey out at -7.2 vs. -7.0 expected and -4.3 in Sep.
  • EuroZone Oct. ZEW Survey out at 1.8 vs. -2.0 expected and 4.4 in Sep.
  • UK Oct. CBI Business Optimism out at 2 vs. 8 expected and 10 in Sep.
  • UK Oct. CBI Trends – Total Orders out at -28 vs. -19 expected and -17 in Sep.
  • US Sep. Housing Starts out at 610k vs. 580k expected and 608k in Aug.
  • US Sep. Building Permits  out at 539k vs. 575k expected and 571k in Aug.
  • Canada Bank of Canada left rate unchanged at 1.00% as expected
Upcoming Economic Calendar Highlights
  • US Fed’s Evans to Speak (1340)
  • US Fed’s Dudley to Speak (1400)
  • US Fed’s Lockhart to Speak (1530)
  • US Fed’s Fisher to Speak (1650)
  • US Fed’s Kocherlakota to Speak (1720)
  • UK BoE Governor King to Speak (1850)
  • US Fed’s Bernanke to Speak (20000)
  • US Weekly API Crude Oil and Product Inventories (2030)
  • US Weekly ABC Consumer Confidence (2100)
  • US Fed’s Duke to Speak (2300)
  • Australia Aug. Westpac Leading Index (2330)
  • Japan BoJ Deputy Governor Nishimura to Speak (0130)

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