IB FX View

Fiscal and lending boost for Chinese

Wednesday July 1, 2009

Currency trading has been thoroughly shaped by Asian market data events overnight. While we had wondered yesterday whether the Japanese yen might benefit from evidence of a strengthening economy within the quarterly Tankan report, the opposite was true. And dealing a double-blow to the yen was news that the Chinese manufacturing economy continues to respond to a wall of customer lending from banks attached neatly to the late-2008 government stimulus program worth around $585 billion.

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Let’s start with Japan where the Bank of Japan’s second quarter survey of large corporations who manufacture electronics, automobiles and other relatively durable items showed not quite the strength economists had hoped for. Having reached an utterly dismal reading of -58 in the first quarter, the expectation surrounding today’s reading was -43. The result, however, was -48, which indicates a nation mired in recession benefiting only marginally from the second quarter recovery of consumer and business confidence seen elsewhere in the world.

The yen lost ground against just about all of its major trading partners. Against both the dollar and euro the yen slumped to approximately two week lows as it neared 97 versus the dollar and 136.75 against the euro. Having risen as a safe haven during the crisis the yen is now finding it increasingly hard work to stay afloat as surrounding nations make better of the recovery. Domestic investors are using their own currency to fund riskier investments abroad as the carry-trade resumes its popularity.

The Chinese economy is expected to grow by 8% according to the latest PBOC review. And judging by today’s PMI survey, which pits the weight of optimists against pessimists within the manufacturing sector, there may yet be a couple more quarters of sustainable growth stemming from the government’s efforts to stimulate its manufacturers and consumers. Having reached a low in November 2008, the PMI broke back into expansion-territory in March and now has shown four straight months of growth. The fact that China is doing better than Japan suggests that stimulus is working, but it also provokes currency traders to ditch the yen and resume their risk appetite with the proceeds. An important element of today’s Chinese PMI survey is the pick-up in export orders. In order for this to prove a sustainable recovery, China will most certainly need the buy-in of the rest of the world. That fact does make us a little suspicious of the PBOC growth projections, but we’ll just have to wait and see.

China is Australia’s largest export market and of course the Aussie dollar was a big beneficiary of today’s news couplet. Against the U.S. dollar the Aussie advanced to 81 U.S. cents compounded by the release of strengthening retail sales. April’s 0.3% rise in sales was flowed by a 1% growth in May’s reading as more consumers took visits to department stores, clothing outlets and restaurants. Strength in consumption has apparently also been fueled by the cash handouts from the government adding to A$12 billion.

Retailing stocks in London and Paris also responded to further evidence that the worst of the recession is over. Britain’s leading retailer, Marks & Spencer recorded a smaller than forecast revenue decline based on warm weather bringing shoppers out in droves. Shares in Europe’s largest retailer, Carrefour rallied also as it announced a three-year plan to cut costs by $6.3 billion. German bank shares also responded well to a story that a new so-called ‘bad bank’ might be set up to take on the ailing assets of some institutions. We mention both of these items because it shows a sea-change in investor attitudes. Six months ago, investors responded negatively to solution for fear of a worsening outlook. Today the proposed solutions of either cost-cutting or resolving banks’ woes is grabbing attention front and center.

The dollar is weaker this morning. The euro buys $1.4150 while the pound has rallied to $1.6535. There was little improvement in the rate of manufacturing contraction out of the U.S. purchasing managers index at 10am, while an ADP survey, a forerunner to Thursday’s employment report showed a larger number of payroll losses for June than was thought likely.

ADP reported some 473,000 jobs were lost, while the Bureau of Labor Statistics is expected to announce 363,000 losses bringing the rate of unemployment to a 26-year high of 9.6%. While this would raise the rate from 9.4% in May, it would be the smallest rate of increase in some months perhaps confirming a slackening of the pace of employment losses. That prospect was bolstered by today’s Challenger Gray and Christmas report of employment layoffs, which registered 74,393 in June – the smallest number of planned firings in some time and the first year-on-year decrease since February 2008.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com

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