IB FX View

Chinese good news greets Secretary Geithner

Monday June 1, 2009

A second monthly reading of expansion for the Chinese purchasing manufacturers’ index was taken as confirmation that Asian recovery is well underway. At the very least the 53.1 PMI reading for May after a 53.5 index in April confirms the benefit of the Chinese government’s $586 billion spending spree announced in October. Investors overlooked the marginal dip in the reading of activity, instead deciding to revel deeper in rising commodity prices and currencies in which they are essentially priced. The theme continues of a rebound in commodity inflation yet it has a bitter twist for the dollar.


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The U.S. dollar continued its descent today despite words of comfort from Mr. Geithner who began a series of deliveries to Chinese officials as part of a week long tour. The euro continues to make hay while the sun shines over European stock indices, and it breached $1.42 earlier in the session. The dollar gained against the Japanese unit to 95.62. Mr. Geithner’s words take solace from recent signs of strengthening global growth spurred on by just a bit of U.S. government spending. His mission is to persuade the Chinese (and the rest of the world) that the spending is both necessary and controllable. He is talking about reducing the debt to GDP ratio to 3% as soon as is practical along the lines of what European governments mandated themselves to do in order to achieve harmony for government budgets and spending across the region.

The Chinese news helped boost risk appetite and prices of commodities in the early trade. The Aussie dollar got close to 81.50 U.S. cents earlier amidst conflicting domestic news. Retail sales grew 0.3% in April after a 2.2% rise in March. The news was a little below market expectations, but in the grand scheme of things was not enough to derail a rally. A measure of consumer prices grew at a snail’s pace of 1.5% on a year-over-year basis leaving the measure beneath the RBA’s target band. Tomorrow the central bank meets to discuss its policy setting and is widely tipped to leave rates unchanged at 3%, which is currently seen as yet another positive for the Aussie unit.

The British pound is once again rallying sharply against the both the dollar at $1.6423 and the euro buys just 86.60 pennies today. The pound continues to benefit from the sensation that the worst is passed and that the earlier depression for the currency was badly overdone. Who dare bet against the British pound just now? The CIPS PMI survey continued to indicate contraction, but once again at a lesser pace of 45.4 against 43.1 in April. Meanwhile a measure of house prices showed little annualized change and again supports the underlying theme that the economy is heading in the right direction for now.

While many central banks meet this week, it’s a very low likelihood across the globe that any will shift rates. What interests us most about these meetings won’t be heard for several weeks as the minutes from each will be delayed. We look forward to hearing the respective banks’ take on the economic situation, which recently was still skewed towards a cautious tone and one that could easily dip back down. The equity markets are the largest challenge to seeing straight once again with an incredible amount of starry-eyed optimism priced in. With all of the headlines crossing the wires, we hardly need remind anyone that this first day of June marks one of the nation’s largest ever bankruptcy filings – a direct casualty of the financial and ensuing economic meltdown.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com

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