IB FX View

Strong Chinese car demand forces safe haven rethink

Thursday July 9, 2009

Thursday’s trade is shaping up to be something of a relief trade. The Japanese yen is down on relief that a key Chinese report shows that its stimulus efforts are alive and kicking. The Aussie dollar is higher after employment losses were not greater. The British pound is stronger relieved by no change in the Bank of England’s appetite for buying debt. The dollar has lost its bid as investors find a lesser need to turn on the safety valve on corporate earnings relief. The key euro-dollar reading is almost back to $1.40 this morning, which looks pretty much like neutral these days.


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A 48% rise in Chinese passenger car sales in June gave a shot in the arm to global stock markets and commodity prices. Growing fears earlier in the week focused on a stall in global recovery, which had driven down energy prices. As those fears mutated the dollar rose and helped undermine further the prices of other commodities along the way. But the stimulus-inspired jump in car sales to the highest level since February 2006 has instilled confidence that the recovery process is still there if you know where to look.

As much as the Chinese news helped economy bulls get back on their feet, a warning from Japan over the strength of its currency helped take the emphasis off the theme of risk aversion. In Wednesday’s trade the yen had a massive day and rose by about 3.5% against the Australian dollar and around 5% against the South African rand. A sudden bout of yen buying saw the Japanese unit take out stop-loss orders along the way as it moved to a five month high against the dollar at 91.80.

The Chief Cabinet Secretary, Takeo Kawamura told journalists that the Japanese government is closely watching market moves and that excessive currency moves were undesirable. Yesterday’s bulls quickly rushed for the exits and took handsome gains on the yen as the apparent specter of intervention feels like a greater possibility than yesterday.

The G8 meeting of finance ministers continues today in Italy where the joint statement appears to take issue with last month’s calls from German Chancellor, Angela Merkel who demanded a reliable and credible exit strategy from the world’s collective $2 trillion fiscal stimulus package. Having chided both the Bank of England and Federal Reserve in the same speech, today there is a lighter tone to that demand. The German push for a change to strategy now rests on creating a sustainable budget plan expressed through an emphasis on when the crisis is over.

The ministers collectively retorted today that it is too early to discuss withdrawal of stimulus simply because the state of the economic recovery is too fragile. President Obama called for the door to remain firmly open to further stimulus, while Britain’s Prime Minister, Gordon Brown said that the G8 felt that it needed to relay an important wake up call to the world. He said that there are still important warning signals concerning the world economy that cannot be ignored.

The pound rose sharply after several days of losses against the dollar. It briefly traded beneath $1.60 on Wednesday and found support in response to the Bank of England’s decision to leave rates unchanged at 0.5% and maintain the status quo on its asset purchases. That latter news provided relief to the currency market and gilt market where prices fell. The yield on the benchmark 10-year gilt rose from 3.58% to 3.76%. All week buyers of government debt scrambled to get long just in case the Bank announced that it would buy even more debt than it is currently authorized to do by the British government. So the announcement that it would not saw buyers’ expectations quickly dashed.

Australian unemployment rose by slightly more than forecast with 21,400 job losses, yet the actual unemployment rate rose only slightly to 5.8%. Once again, that news accompanied by a reminder of the health of Australia’s best export market helped buoy the Australian dollar to 78.38 against the U.S. dollar. Wednesday’s Aussie losses versus the yen were deemed to be too rapid and so the wave was reversed Thursday with the official’s comments making the decision to ditch yen for Aussie dollars, that bit easier.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com

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