China to exit stimulus plans?

Governor Bollard from the RBNZ stated last night that they do not anticipate ‘hiking interest rates until mid-year’. With the SNB this morning, the market will be focusing on their policy on FX intervention in EUR/CHF. Economic indications and inflation forecasts ‘did not require’ the sort of intervention that surprised and upset the markets last year. There is no doubt it, Hillenbrand ‘does not want to see a strong CHF’. However, expect rhetoric to indicate that ‘a relative improvement’ in the economy coupled with the strong CHF will help to contain inflation, the ‘normalization process’, and allow the SNB to move back to interest rate policy at some point. Chinese consumer inflation jumped to a 16-month high in Feb., coupled with other data displaying ‘broad-based strength’, is providing fresh arguments for policy tightening sooner rather than later by the PBOC. This will pressurize bourses, specifically in Australasia. Also this morning, I see that Greece continues to work towards implementing their self-imposed, European backed, questionable austerity measures, by paralyzing the country in its second national strike!

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

Forex heatmap

Finally there was some data to chew on yesterday. The US whole sale inventory, on the face of it, disappointed as a new all-time low on the wholesale inventory-to-sales ratio was achieved. Inventories unexpectedly fell (-0.2% vs. +0.2%). With the drop across all the sub-categories in nominal terms has analysts believing that it was due to a price-adjusted drop, which will end up being a drag on the US GDP for the 1st Q. On the other hand, sales continue to grow (+1.3%, m/m), broadly based, so probably not a ‘price distortion’. Both durable and non-durable goods accounted for the increase. As analysts note, recent reports suggest the ‘replenishment of depleted stockpiles will lift production in coming months’. These on-going efforts helped the US economy expand at +5.9% last quarter (the fastest pace in six-years).

Reports have shown that US mortgage foreclosure filings dropped for a second straight month in Feb., and produced the smallest increase in four years as housing-rescue efforts contained activity. The US housing market remains ‘vulnerable’ to set backs and continues to rely heavily on government intervention. This is an important indicator, if foreclosures keep dropping it will send a strong signal that ‘the market is on the path to recovery’.

The USD$ is weaker against the EUR +0.04%, GBP +0.14%, CHF +0.03% and JPY +0.03%. The commodity currencies are stronger this morning, CAD +0.16% and AUD +0.16%. Despite remaining the darling of growth currencies and even with commodities prices ‘to and fro’ there is an appetite to own the currency as speculators gamble on these ‘growth’ prospects. The currency continues to congest vs. its southern partner and certainly outperform on the crosses. Traders are waiting for today’s trade numbers and tomorrow’s all important Canadian employment report. Technically, the currency is on course to test the USD support levels close to 1.0200. Depending on this week’s data, the domestic currency may have the momentum to provide another parity onslaught where it should run into strong opposition. Last week, the BOC did what was expected of them, by keeping rates on hold. It seems that they are potentially ‘behind the curve’. Their communiqué was hawkish in nature, leading to somewhat predictable rate increases for the second-half of this year. The BOC must be concerned about the loonies’ strength of late. However, it has occurred in an orderly fashion and rapid appreciation for speculative reasons would have sent alarm bells ringing. The trend remains your friend. Expect better buying of the domestic currency on USD rallies in the medium term. Record IMM long growth currency positions may put a spoke in the wheel.

The AUD managed, at one point, in the O/N session to print a seven-week high, but backed off slightly on the back of the Australian employment report (+0.4k vs. +15.2k). In Feb., the economy added the fewest jobs in six-months, which suggests that the RBA ‘has room to slow the pace of future interest-rate increases (+4%)’. The pause in the employment boom ‘may prompt some consumers to trim spending in coming months’. Of late, robust Chinese export numbers have had investors demanding higher yielding growth currencies. Expect Chinese policy tightening to eventually cool the demand for the AUD as a ‘first play’ growth currency. Last week the RBA hiked rates by +25bp to +4%. Governor Stevens said ‘rates should be closer to average’, which policy makers have indicated may be 75bp higher than the current +4%. Analysts believe that the ‘the biggest jobs boom in more than 3-years and a surge in business confidence suggest Australia’s economy is already growing at or close to trend, after escaping recession during the global crisis’. Reading between the lines, we should expect the RBA to hike with a ‘gradual approach’. Continue to expect better buying on deeper pull backs (0.9161).

Crude is lower in the O/N session ($82.02 down -7c). Crude bulls are wearing ‘diamonds’ this morning as the commodity maintains its upward momentum, setting its sights on old resistance targets. Yesterday’s weekly EIA reports are supporting the technicals. Mind you, a softer ‘buck’ is also aiding the black-stuff. The weekly report showed a decline in supplies of gas and distillate fuels. Gas stocks dropped -2.96m barrels to +229m vs. an expected ‘little change’ scenario. Distillate supplies (heating oil and diesel) decreased -2.22m barrels to +149.6m. It was expected that stockpiles were to fall by only -1m barrels. On the flip side, crude inventories rose +1.43m barrels to +343m vs. an expected climb of +2m barrels. An OPEC report yesterday stated that member states will need to produce more oil than previously estimated. It’s expected that the members need to be pumping +28.94m barrels a day to satisfy this years global demand. That’s an increase of +190k barrels a day over last year’s projections. OPEC meet next week to decide production quotas. Already member representatives say that ‘no new decision’ about production levels is expected at the meeting as ‘projected demand levels are still much less than OPEC’s current production’. This scenario will increase stockpiles. With momentum and an investor attitude that the economic situation will not get much worse will support commodities on pull-backs.

For a fourth-consecutive trading session this week the ‘yellow metal’ has struggled. It managed to print new weekly lows this morning as the dollar maintains its buoyancy vs. the EUR, thus reducing the demand for the metal as an alternative asset. Comments earlier this week from China have also managed to weigh on the commodity. Authorities indicated that ‘bullion probably will not be the country’s main reserve investment’. Technically that means they will ‘have to hold dollars’. As we wait for US Trade and claims data investors have been happily cashing in profits that were booked using other G7 currencies. Forgetting Greece, it’s all about the performance of the dollar. Currently, any signs of weakness and we will have buyers happily enter the market. Until then, the bulls are the unlucky investors. Last month the commodity managed to print its first monthly gain since Nov. European sovereign debt issues and a ballooning UK deficit with the potential of ‘hung’ parliament after the next general election had investors seeking some sort of portfolio surety back in Feb. Will we see the same interest at lower levels ($1,106)?

The Nikkei closed at 10,664 up +101. The DAX index in Europe was at 5,940 up +4; the FTSE (UK) currently is 5,635 down -5. The early call for the open of key US indices is lower. The US 10-year backed up 3bp yesterday (3.73%) and is little changed in the O/N session. The FI asset class felt the pressure from a somewhat buoyant equity market and US supply issues this week. The short end of the curve has been better bid despite the plethora of product. The appetite has been aided by Fed rhetoric stating that ‘low interest rates are likely to be needed for some time, as high unemployment lingers and inflation stays below target’. Yesterday’s 10-year auction ($21b) was well received. The bid-to-cover ratio was 3.45 compared with 2.67 in Feb. and 3.00 in Jan. The average has been 2.83 from the past 8-auctions. Indirect-bids (proxy for Cbanks) were +35%, compared with +33.2% in Feb. and +29% in Jan. The average was +42.3% for the last 8-auctions. Today we get to bring down the last of this week auctions, the long-bond ($13b).

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