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Forex: Feeling the Impact of China

Last updated 9/9/2010 4:16 PM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• FOREX: FEELING THE IMPACT OF CHINA
• EUR: MIXED ECB COMMENTS
• GBP: TRADE DEFICIT HITS RECORD HIGH
• CAD: EMPLOYMENT REPORT ON TAP
• AUD: UNEMPLOYMENT RATE FALLS TO 18 MONTH LOW
• NZD: OIL AND GOLD DOWN
• JPY: REBOUNDS AFTER HITTING NEW HIGHS

EXPECTATIONS FOR UPCOMING FED MEETINGS

FOREX: FEELING THE IMPACT OF CHINA

Today’s price action in the forex market was mixed with the greenback rising against the European currencies but falling against the comm. dollars. For once, USD/JPY did not fall to a new low overnight and instead ended the NY trading session unchanged. The divergence in currency movements confirm that investors are not just reacting to the developments in the U.S. but are closely watching the economic trends of countries around the world. Relative growth is replacing risk on / risk off as the primary driver of currency fluctuations. This should not be surprising considering that we are seeing growing divergences in economic activity.  For example, the latest employment numbers show the Australian economy charging full steam ahead while U.S. trade activity benefitted from a pickup in exports. In contrast, Canada and the U.K. reported record trade deficits in the month of July on falling exports. Every one of these countries is feeling the impact of China whose demand or lack thereof has played a large role in the global recovery. 

Feeling the Impact of China

After reporting a record trade deficit in the month of June, the U.S. trade gap shrank more than economists had anticipated in July. The deficit narrowed from -$49.76B to -$42.77B as exports outpaced imports. Demand for civilian aircraft and telecommunications equipment played a role in the improvement but the primary reason is a reversal of import demand from China. In June, Chinese imports into the U.S. surged ahead of the expiration of export subsidies on more than 400 goods.  At the end of July, China no longer provided tax rebates on exports which reduced the competitiveness of Chinese goods. Therefore unless Chinese companies take a hit to profitability and leave prices unchanged, we could see exports to the U.S. (and in turn U.S. imports from China) start to slow and the improvement in the trade balance reverse. Tomorrow’s Chinese trade report which will be for the month of August and it will provide more information on whether Chinese exports to countries like the U.S. have slowed. If China’s trade surplus remains above $20 billion (it is currently at $28.73B), it will be a big boost for risk appetite because it implies that the Chinese economy continues to grow at a strong enough pace to support the global recovery.  Countries that are heavily tied to China continue to benefit from their demand. Australia for example reported impressive employment growth in August while Japanese exports rose more than 23 percent in July thanks to a double digit increase in exports to Asia. 

Calls for Yuan Appreciation Could Return

Yet stronger Chinese trade numbers could fuel fresh calls for Yuan appreciation. The reason is because it would indicate that the Chinese economy continues to perform well at the expense of others. China’s currency policy is on the discussion table next week for the U.S. House Ways and Means Committee. With mid-term elections right around the corner, protectionism could increase with legislators attempting to push through tariffs and other measures to decrease the competitiveness of Chinese corporations. Having just revalued the Yuan in June, China is not likely to budge even though the Assistant Central Bank Governor said last night the Yuan needs to increase in flexibility.  China revalues on their own time schedule and until that happens, trade tensions will cool as the issue gets pushed to the sidelines once again. 

Meanwhile the weekly jobless claims report was much better than expected with claims falling from 478k to 451k. There are no additional U.S. economic reports on the calendar this week which leaves the market’s focus on China who not only has their trade balance scheduled for release but also producer prices, consumer prices, retail sales and industrial production. These days, Chinese economic reports can be even more important than U.S. reports. 

EUR: MIXED ECB COMMENTS

The euro may have ended the day unchanged against the U.S. dollar but not before some topsy-turvy intraday movements. German consumer prices were the only piece of Eurozone economic data on the calendar and euro traders were happy to see CPI revised slightly higher in August. However even with the upward revision, inflationary pressures are nonexistent because the annualized pace of German CPI growth is only 1.0 percent. Comments from European officials dominated the headlines and the comments were conflicting, causing the EUR/USD to see-saw during the European and U.S. trading sessions. All central bankers stressed the need for caution and the uncertainty that lies ahead but their outlooks varied. ECB member Mersch for example believes there is a self-sustaining recovery in the Eurozone. Liikanen expects Eurozone growth to slow as stimulus ends while Ordonez said more episodes of financial instability cannot be ruled out.  According to Mersch, the next ECB meeting on emergency measures will be December which means the next 2 meetings will probably be anemic. The ECB monthly bulletin was also released and it pretty much echoed the comments made by Central Bank Governor Trichet last week. Meanwhile there were reports that Deutsche Bank is considering a stock sale worth as much as 9 billion euros.   If the bank follows through with this decision it could have an impact on foreign exchange. First, foreign investors participating in the sale would have to buy euros and second, if the sale exceeds or falls short of expectations, there will be repercussions across the financial markets.  Like the U.S., no major economic data is expected from the Eurozone tomorrow which leaves the EUR/USD at the whim of Chinese economic data. 

GBP: TRADE DEFICIT HITS RECORD HIGH

The British pound ended the NY trading session slightly lower against the U.S. dollar, but on an intraday basis, the currency staged a healthy recovery after very disappointing trade numbers. The U.K. trade deficit climbed to 8.7 billion pounds in July as the combination of rising imports and falling exports widened the trade gap to its largest level ever. The increase was due to higher oil prices and purchases of chemicals. The latest trade numbers confirms that the U.K. economy is in trouble because import demand is not likely to be sustainable with the VAT tax hike and fiscal austerity measures.  Exports are also falling which explains why manufacturing activity has slowed significantly.  These recent disappointments in UK economic data have and will continue to keep the Bank of England on hold. The BoE did not change interest rates or the size of their Quantitative Easing program during their monetary policy meeting this morning.  Producer prices are scheduled for release tomorrow and we have good reasons to believe that the UK producer prices increased in the month of August. Not only did the GBP/USD decline which is positive for inflationary pressures but the latest PMI reports show a sharp acceleration in price growth. Manufacturing prices rose for the tenth month in a row thanks to higher prices for chemicals, electronics, and metals. Input prices in the service sector also increased. Inflation is a problem that the Bank of England is having a tough time controlling and we expect the PPI report to indicate that the problem remains a persistent one.

CAD: EMPLOYMENT REPORT ON TAP

The Canadian, Australian and New Zealand dollars all strengthened against the greenback despite weaker than expected Canadian economic data. Like the U.K., Canada reported its largest trade deficit ever.   In the month of July, the Canadian trade gap widened from –CAD$1.8B to –CAD$2.7B. Imports increased but exports to all countries fell 0.7 percent as exporters feel the pinch of a weaker U.S. recovery and a strong currency.  The latest trade report will add some two way action in the Canadian dollar which soared after the Bank of Canada raised interest rates yesterday. The BoC could reconsider future rate hikes if the U.S. recovery slows even further but for the time being, we still expect another 25bp rate hike before the end of the year. Canadian employment numbers are scheduled for release tomorrow and economists are looking for significant job growth. A hot labor market report will cause traders to quickly forget about today’s disappointing trade numbers. Meanwhile anyone who wants to find a job should go to Australia.  The country continues to report solid employment numbers with another 30.9k Australians finding new work in the month of August.  As a result, the unemployment rate in Australia fell to an 18 month low of 5.1 percent (matching the rate in June). To put this into perspective, the U.S. unemployment rate is currently 9.6 percent.  Eighteen months ago it was 7.7 percent and yesterday Fed President Kocherlakota basically said there is no chance that the unemployment rate will dip below 8 percent before 2013.  Countries that supply to China continue to perform extremely well despite their slowdown in growth thanks to a heavy backlog.  The strength of the Australian economy has driven the Aussie to a record high against the euro

JPY: REBOUNDS AFTER HITTING NEW HIGHS

The Japanese Yen ended the day virtually unchanged against the U.S. dollar, lower against the commodity currencies and higher against the European ones. Funding currencies in general had a mixed day as the market turns its focus to relative growth. With another possible change in government, a strong Yen and a slowing economy, Japanese consumers have grown more pessimistic. We saw that in yesterday’s Eco Watchers Survey and also in last night’s consumer confidence report. The confidence index fell from 43.4 to 42.5 in the month of August, the second consecutive monthly decline as fewer people were certain about the employment situation and their overall livelihood. According to the Cabinet Office, “Consumer confidence is marking time after showing moves for an improvement." Having been optimistic about consumer confidence last month, the Cabinet has now downgraded their assessment. However one part of the economy has a positive outlook and that is the manufacturing sector. Despite a strong currency, the BSI report shows that Japan’s largest manufacturers grew more optimistic for the fifth consecutive quarter. Final revisions to GDP are scheduled for release evening and economists are looking for a big upward revision.  Meanwhile, conflicting comments are coming out of Japan. In a government meeting last night, Finance Minister Noda said the Yen rise was discussed but Bank of Japan Governor Shirakawa said they did not talk about forex or monetary policy. Noda suggested that Japan will discuss forex intervention in upcoming G7 meetings with the hope of eliciting support for coordinated intervention. 

USD/CAD: Currency in Play for Next 24 Hours

USD/CAD will be the currency pair in play tomorrow with the Canadian employment report scheduled for release at 7:00am NY Time or 11:00 GMT.

The latest sell-off in USD/CAD has pushed the currency into our downtrend zone which we determine using Bollinger Bands.  The closest support level is 1.03, which is a price point that has held for the past month. If this level is broken, the next area of support for USD/CAD is at the August low of 1.0110. If USD/CAD manages to climb back above its resistance level of 1.04 (which is where multiple moving averages converge), then the currency pair will most likely resume range trading and head back towards 1.05. 

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.