What’s ‘Made in China’, Global Growth is hoping it’s not fake

Chinese trade data over the weekend reported an aggressive +55.9% rise, y/y, in imports last month, while exports increased to +17.7%, the first positive print in 14-months. China, now the global engine to economic recovery, has raised the risk appetite of investors. They have aggressively pushed growth commodity currencies like the loonie and Aussi towards parity vs. the dollar. Presently, capital markets have shrugged off the disappointing NFP number last week and have accepted that Bernanke will have to keep O/N ‘rates low for an extended period of time’. Robust commodity prices are keeping global bourses in the black. Analysts are predicting that the EUR will recoup all of last month’s losses over the next few weeks. With the entire Chinese financial stimulus that we are aware of, is it at all possible that the capitalist communist country is creating its own asset bubble?

The US$ is weaker in the O/N trading session. Currently it is lower against 14 of the 16 most actively traded currencies in a ‘volatile’ trading range.

Forex heatmap

Friday’s NFP was weaker than expected, but not dramatically so. On reflection, the reported surprises should not change the markets view that the US labor situation is still improving. The headline print fell -85k vs. expectations of a flattish print. Interestingly, the revisions to the previous months caused little concern. Nov. was the big surprise, reversing its original -11k decline to record a positive +4k print. Digging deeper, some of the shortfalls were due to a -21k decline in the government sector, while in the private sector both construction and services witnessed cuts. A healthy sign was not seeing a weaker headline for factory losses as it registered a decline of only -27k. The positives again were seen in the temporary hiring sector, posting a strong +47k. The market will now be anticipating job growth by the end of the 1st Q as other job indicators point to a positive trend. The unemployment rate remained static at +10%. The actually number of unemployed workers fell by only -73k, not enough to make any impact on the rate.

Do not ignore Friday’s US wholesale inventory report (+1.5% vs. -0.2%). It was the largest advance in nearly five years and indicates that companies are picking up the pace of orders as sales improve. For most of last year, inventories were the scourge for companies. In reality, stocks were drawn down at a record pace for most of the year. The inventories print along with the positive revisions for Oct. will play a major role in boosting 4th Q GDP (assuming that the rise is in real terms and not just price effects).

The USD$ is currently lower against the EUR +0.58%, GBP +0.34%, CHF +0.41% and JPY +0.09%. The commodity currencies are stronger this morning, CAD +0.26% and AUD +0.37%. Similar to its southern neighbor, the Canadian jobs report was worse than consensus expected (-2.6k vs. +20k). However, the unemployment rate remained unchanged at +8.5%. Investors should take heart, Nov.’s print (+79k) was a high benchmark to follow. Most analysts will tell you that it was a decline print ‘largely rooted in technical distortions’. Optimists will preach that as the US starts adding jobs, the trickle down effect will lead to Canadian job gains and an increase to cross-boarder production. Digging deeper, one should be wary about the self-employment category. Dec. reported another positive print of +15k. A drop in public sector jobs drove the entire headline decline (-22k), offset only by a mild +4.3k rise in private employment. With the labor force actually contracting last month (-8.9k) did not lead to a higher unemployment rate. Health care and social assistance posted the largest gain in employment at +35k. The scientific sector also experienced an increase of about +33k during the month. Combined, they were the largest offset to the losses posted in the transportation (-23k), finance (-17k), public administration (-22k). On the plus side, aggregate hours worked rebounded, rising +1.5%, m/m. This is a good sign perhaps to seeing employment rise for the month of Jan. Despite the weak data, robust commodity prices are supporting the currency rally vs. the greenback. In the O/N session, the loonie managed to record its strongest print in two months. Year-to-date, commodity prices have pushed the currency into BOC Carney’s ‘less than comfortable zone’. They next meet on Jan 19th and do not be surprised to have him comment on the currency strength impeding economic growth. We all know that commodity prices and the loonie go hand-in-hand. The loonie ended last month officially posting its biggest yearly gain in 2-years. Traders and speculators have been using any USD rally to increase their long CAD exposure citing a stronger risk tolerance as the primary reason.

As expected the AUD rallied to its strongest level in a month vs. the greenback on the back of China declaring that its imports reached record highs last month with shipments from Australasia more than doubling. Data showing advertisements for job vacancies at a 24-month high also helped to push the currency higher. Stronger fundamentals and robust commodity prices will surely keep the RBA on their toes regarding tightening monetary policy again next month. To date they have led the world in rate hikes (three in total) since Sept. Governor Stevens last raised rates at the beginning of Dec. by 25bp. Futures are now predicting that there is a +62% chance that RBA’s O/N lending rates will reach +4% by the beginning of Feb. (0.9314). If the global economic recovery remains on track, the market should expect the AUD to be trading at parity to the USD by years end. Basically they are in a similar situation as the loonie.

Crude is higher in the O/N session ($83.57 up +82c). Despite a disappointing US jobs report, the weakness of the greenback kept oil prices elevated. Since late Dec. the black-stuff has appreciated +16%, aided by the surprisingly deep global cold snap. Yesterday, China (the 2nd largest energy consumer), showed that they had increased crude purchases to a record last year to meet rising demand boosted by the government’s stimulus spending. Their oil imports reached +4.1m barrels a day and with their staggering trade numbers, their appetite for the commodity should not wane any time soon. Last week, US crude inventories rose for the first time in a month, vs. the consensus of a draw down on stocks. Crude stockpiles increased by +1.3m barrels to +327.3m vs. an anticipated -300k decline. This is in stark contrast to the earlier API data which reported a -2.3m drawdown. This report has reversed a four week trend of draw-downs. There was a similar story with gas whose stockpiles grew by +3.7m barrels to +219.7m vs. an expected increase of only +300k barrel. Distillate stocks (include heating oil and diesel) fell by -233k barrels to +159.0m. The market had been expecting a decline of -1.8m barrels. Refining capacity utilization fell -0.4bp to +79.9%, its lowest level in 5-weeks. Despite the weekly report being bearish for crude prices, investors are not focusing wholly on market fundamentals, but on the value of the dollar for the time being. Technically, when this immediate cold snap improves fundamentals will finally get to weigh on prices. Forecasts for below-normal temperatures through mid-Jan. are expected to erode some of fuel stockpiles.

The ‘yellow metal’ ended the day higher on Friday, erasing its initial losses, as the greenback plummeted on an unexpected drop in US jobs. With Chinese data providing stronger evidence of a global economic recovery has again renewed dollar selling pressure in the European session, thus boosting the demand for the commodity as an alternative investment. Traders expect gold to maintain its bullish momentum again this week. Analysts are reassessing their average yearly commodity valuation higher to above $1,200. A point of note, last year’s average was $974. Again, if one wants to own the ‘yellow metal’, it would be more beneficial to cross it with the EUR or GBP. Currently, this cross is getting more ‘bang for the buck’.

The Nikkei closed at 10,798 up +116. The DAX index in Europe was at 6,085 +48; the FTSE (UK) currently is 5,591 up +57. The early call for the open of key US indices is higher. The US 10-year’s eased 1bp on Friday (3.84%) and are little changed in the O/N session. Short term bonds climbed the most in nearly 5 months after NFP data disappointed. The 2’s/10’s spread widened out to new record levels (287). Despite showing signs of improvement, the US labor market has yet to emerge from its worst slump since the great depression. The scenario justifies the Fed keeping O/N borrowing costs at record lows for an extended period of time. This week the Treasury will sell $10b of 10-year TIPS today, $40b of three-year notes tomorrow, $21b of 10-year securities on Wednesday and finally, $13b of 30-year debt on Jan. 14. That is a total of $84b worth of product. As per usual, traders will want to cheapen the curve to absorb product. Expect to see an uptick in foreign demand at the auctions, unlike the weak response we witnessed over the holiday period.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell