March 10, 2010

Daily outlook

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The U.S. dollar put in a mixed performance overnight, holding steady against the euro, firming against the broadly heavier British pound, but falling to a seven-week low against the resurgent Australian dollar.

Robust Chinese trade data for February showed steep increases in both imports and exports, which signaled surprisingly strong domestic demand and impressive return of global trade activity after it was ravaged in the wake of the global credit crisis. The encouraging figures, while likely skewed by holidays and a very low baseline reading from a year earlier, boosted investors’ sentiment and pushed the Aussie, higher across the board. Australia’s close trade relationship with China leaves the AUD vulnerable to swings in the outlook for Beijing’s commodity demand and generally, the outlook for China’s economy.

Surprise contraction in both manufacturing and industrial output in the U.K. in January highlighted Britain’s very weak economic recovery and fanned worries about additional credit easing from the Bank of England. Sterling fell to an 11-month trade-weighted low following the disappointing data.

Another lack of economic news in the U.S. and Canada should leave the currency markets looking for direction in moves in stocks and commodities. Firmer equities and improved sentiment could push the dollar back toward the lower end of its recent ranges.

Currencies outlook

GBP: The British pound fell to a one-week low against the greenback and a new record trough against the Canadian dollar. On a trade-weighted basis, the pound fell to a new 11-month trough. Overnight, data showed 0.9%(m/m) drop in manufacturing production in January, which confounded expectations for a 0.3%(m/m) rise and erased all of the improvement in the sector in December. Industrial output, the broader measure of activity in the factory sector, fell by 0.4%(m/m), confounding expectations for a 0.3%(m/m) rise. The disappointing data once again highlighted the British economy’s very lackluster recovery, which ultimately keeps the door to further monetary easing from the Bank of England open. The BOE has pledged stimulate conditions further if growth fails to return to its economy or if inflation dips back below its target. In addition to the potential for additional easing from the BOE, the pound continues to suffer from the U.K.’s dire state of public finances and from the likelihood of an upcoming election resulting in a hung Parliament.

CNY: Data overnight showed a robust pace of growth in China’s imports and exports in February, highlighting the resilience of the world’s third largest economy, which as become a key engine of regional and global growth. Chinese exports jumped by 45.7%(y/y) last month while imports rose by 44.7%(m/m) following record 85%(y/y) rise in January. The figures were an encouraging sign that global trade conditions, which suffered in the wake of the global credit crisis, are returning to more normal levels. It also highlighted the surprising improvement in domestic demand in China. Some have speculated that rising consumption in China and improved global demand for its exports could prompt Beijing to allow the yuan to rise versus the dollar, against which it has effectively been pegged since the financial meltdown two years ago. A stronger currency would act to slow export growth and mitigate inflation, a de facto tightening of monetary conditions. The data however, was likely skewed by China’s lunar New Years celebrations and the very low reading of baseline trade statistic from a year earlier. Nevertheless, the strong figures have supported commodities and equities and helped improve investors’ appetite for riskier assets.
AUD: The Australian dollar rose to a seven-week high against the greenback and touched on a one-week high against the Canadian dollar, broadly supported by the robust Chinese trade data for February. Because China is Australia’s largest trade partner, its economy tends to benefit from signs that Chinese growth is accelerating and that its voracious demand for commodities will continue. However, if Chinese officials continue to signal that they intedt to slowly apply the breaks to their red-hot economy, whether through targeted credit tightening to mitigate a real estate bubbles or a rise in the value of the yuan, the Aussie, along with other commodity currencies, would become vulnerable.