EURO-China love affair

China has stepped up to the plate and is deemed again the savior for Capital Markets. Moving to center stage over the weekend, China has followed up last weeks strong import figures with data showing a rise in industrial production (+13.9% in Aug.) and a continued increase in consumer prices (+3.5%). This is helping to lift some of the recent global fears of achieving or creating a double-dip scenario in the US. The data is providing support for the EUR and giving a thumbs up to ‘risk-on’ trading strategies. China is the Euro-zone’s largest trading partner, +22% of German exports head to mainland China.

The US$ is weaker in the O/N trading session. Currently it is lower against 13 of the 16 most actively traded currencies in a ‘whippy’ trading range.

The greenback is under pressure from calls that the Fed should be buying more bonds, the JPY is capped ahead of tomorrows leadership election in the ruling Democratic Party. It’s all about risk and the demand for risk is very much in vogue. Growth revisions within the Euro-zone continues to provide support for the EUR. The EC this morning indicated that Europe’s economy may grow twice as fast than originally predicted this year (GDP +1.7% vs. +0.9%). The Commissioner stated that the economy is ‘clearly on a path of recovery and ‘the rebound of domestic demand bodes well for the job market’. The statement did come with a disclaimer this morning. ‘However, uncertainties remain and safeguarding financial stability and continuing fiscal consolidation remain key priorities’. With little data to chew on today, the market blindly gets to test the demand for risk from North America.

The USD$ is lower against the EUR +1.05%, GBP+0.75%, CHF +0.45% and JPY +0.13%. The commodity currencies are stronger this morning, CAD +0.44% and AUD +0.63%. The loonie advanced for a second consecutive week on Friday on the back of a BOC rate hike (+1%) and a stellar jobs report. Despite the unemployment rate edging one tick higher to +8.1%, the economy added another +36k new monthly jobs last Friday (+80k full-time and -44k part-time). Governor Carney has explained away last Wednesday’s +25bp BOC hike, by stating that higher rates are somewhat offset by lower bond yields. In his communiqué, Governor Carney signaled that Canadian policy makers may increase rates again this year as the nation’s economy continues to grow. ‘Financial conditions have tightened modestly but remain exceptionally simulative’. The market has taken this as a dovish signal to own more CAD. The loonie is receiving ‘three-prong’ support, a less dovish BOC, a currency being used as a proxy for growth and to a lesser extent a safer heaven investment. A higher percentage of speculators seem to have missed most of last weeks ‘move’, the market should expect to witness better buying of Canadian dollars in the short term.

In the O/N session the AUD has climbed to its strongest level in 5-months on signs that sustained economic growth in China and the US will continue to boost demand for higher-yielding growth assets. With China’s retail sales and industrial production reports topping analysts expectations over the weekend will have the AUD well supported on any pull backs as commodity prices advance. The market is also pricing in a good retail sales number tomorrow for a second consecutive month in the US. The currency is threatening to take out yearly highs as domestic data has also aided the currency’s climb. Employers last week added more jobs than the market had anticipated (+30.9k vs. +25k), pushing the unemployment rate lower (+5.1% vs. +5.3%). Traders are again increasing their bets that the RBA will hike at its next meeting. Futures prices are currently pricing in a +26% chance that Governor Stevens will start tightening again on Oct. 5th. Analysts believe that the market is somewhat underestimating the number of chances of further tightening over the next 6-12 months. Not helping the currency will be the forming of a minority government. PM Gillard won the backing of key independent lawmakers last week, allowing her Labor Party to retain government and pursue a ‘tax on mining companies’. Technically, ‘the fiscal outlook looks worse under a minority government and management of an economy growing at +10% in nominal-terms may increasingly rest on the RBA’ (0.9325). No matter, risk like the AUD in the short term.

Crude is higher in the O/N session ($77.30 +85c). Crude prices rose to a monthly earlier this morning as North American and Asian economic indicators restored confidence that a global recovery will stimulate overall fuel demand. Also aiding commodity prices is last week’s bullish EIA inventory report. It recorded an unexpected decline in inventories, ‘with oil supplies falling -1.85m barrels to +359.9m vs. an expected climb of +1m barrels. Not to be outdone, gas supplies declined -243k barrels to +225.2m. They did happen to beat analyst’s forecasts of a decline of -1m barrels. The 4-week average demand for gas was +1.1% higher than a year earlier, averaging nearly +9.4m barrels a day. US refineries are running at +88.2% of total capacity, up +1.2%, w/w. The market had been expecting a decline to +86.3%. Finally, distillate fuel (diesel and heating oil) fell by -400k barrels to +174.8m barrels vs. an expected increase of +940k barrels. The market is wary that the underlying situation has not changed, the overall fundamentals remain weak and stockpiles of crude and products remain close to their record highs. Analysts expect speculators to remain better sellers on up-ticks in the short term. Mind you, weaker shorts are getting nervous.

On Friday gold prices fell, capping the first weekly loss for the asset class in 7-weeks. A healthy purge has been in the cards for ‘one-directional lemming gold trading’. A rebound in global bourses has curbed the demand for the commodity as a ‘safer’ heaven asset class. The global ‘fear’ factor currently does not have the momentum to push the commodity to new yearly highs. Surprisingly stable global data of late has sped up the liquidation of risk aversion trading strategies. The market will now have to wait and see where support comes back in for the commodity before piling again into that trade. There is an over whelming consensus that the precious metal remains poised to rally to all-time high later this year. The commodity has managed to post yearly gains over the previous nine years. The opportunity costs of holding gold are low due to falling interest rates, by default, the market should expect small better buying of the metal on pull backs ($1,245 -150c).

The Nikkei closed at 9,321 up +83. The DAX index in Europe was at 6,258 up +44; the FTSE (UK) currently is 5,5547 +46. The early call for the open of key US indices is higher. The US 10-year backed up 6bp on Friday (2.79%) and another 5bp in the O/N session (2.84%). Last week, the US yield curve pushed higher, the most in 5-months, as fundamental data provided ‘some’ proof that the economy may be able to sidestep a double-dip recession. Not supporting FI prices has been the up-tick in corporate issuance of late. The private sector has been content taking advantage of these historical low yields. The 2/10’s spread has widened another 6bp to +222bp as the market again embraces risk.

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