Market Comment:
The Chinese trade surplus in February almost performed a disappearing act as it came in at under $5 billion versus the more than $25 billion expected. The drop was mostly attributable to a steep -25% YoY fall in exports. The FT points out that the decline could be even worse than the numbers are showing due to holiday effects. With perfect hindsight, it seems obvious that the surplus should be shrinking rapidly considering the abundant anecdotal stories of a collapse in world trade, but now the evidence if finally showing up in black and white in the numbers. So what is the spin on this development for the USD? The most important result of this development is the rapid slowing of Chinese reserve accumulation, which will mean that China will have a far smaller appetite for US treasuries. This is clearly USD bearish. On the other hand, the slowing of reserve accumulation means less pressure on the Yuan to appreciate – something that could be considered USD bullish as it lessens the need for the USD negative reserve diversification assuming that China wants to stem Yuan appreciation. Clearly the market seems more focused on the US treasury angle considering massive debt issuance from the US. One thing is clear: to combat the economic slowdown in production and export, China is going on a massive spending spree on infrastructure and other outlays and we must consider the potential capital flows from this.
Watch out for the other important data out of China tonight.
The Chinese stimulus spending is already evident in the huge increase in fixed asset investment for February and is probably one of the pillars of support for the Australian dollar, which has remained relatively buoyant despite the recent meltdown in equities. The Aussie is an interesting to watch as it trades at a new four day high as of this writing and as it has remained stuck in a range for over a month now. A rally needs a break higher through the 0.6550 area to garner further momentum – see more in the chart below.
EURUSD is a technical basket case as it saw a failed breakout above key resistance yesterday and then reversed violently as shorter term breakout models were stopped out. It then also failed to follow through on the reversal and is now rallying again. The Chinese news and our arguments yesterday about a possible focus on the risk of a move to more
aggressive quantitative easing by the Fed could trigger a USD sell-off in the shorter term, though we think there are too many questions in the medium term for the EUR for this to be anything more than a rally within an overall bear market for EURUSD. We think that the risks of a strong response from the Fed/Treasury are very high if the US 10-year benchmark strays sharply above the 3% level (it is trading at 2.99% as of this writing) If the Fed does breakout the monetary firehoses, we would expect GBPUSD to rally sharply in response since the BOE has already let the debt monetization cat out of the bag.
Along with other market participants, we have a hard time getting our hopes up that we have seen “The Bottom” in equities despite yesterday’s huge rally, which was a textbook, steep bear market rally. The fact that the uptick rule on short selling was reinstituted yesterday suggests that short sellers squaring their positions may have been part of the reason for the action. Still, the market rally did help but an emphatic bottom in EURCHF for now, as did the news of UBS worse than originally reported loss in 2008 and cautious outlook for the coming year. The UBS story reminds the market about the potential for further weakness for the franc due to the ongoing debate about banking secrecy policies in Switzerland. Other credit for the rally in equities was given to the Citibank results and Bernanke discussing the need for a more comprehensive approach to regulating banks.
SEK hit its stride yesterday as the combination of a rally in equities and the big reversal in CEE currencies back to the strong side pushed EURSEK sharply through the key support at 11.40, which now becomes resistance. The move stronger in SEK should last as long as risk appetite remains robust.
Watch out for the RBNZ on tap tonight. Expectations have shifted closer to 50 bps rather than 100 bps for the planned cut from the central bank. NZDUSD never managed to get very comfortable below 0.5000 and could be in a rallying mood in the short term if the overall USD weakness extends here and if the guidance from the bank is not too dovish. AUDNZD is also of interest as it approaches the big 1.3000 level, close to which it topped out in 2008.
Chart: AUDUSD again
AUDUSD has remained remarkably rangebound over the last few weeks. The latest action looks more promising for those looking for an upside break as the descending line of consolidation is giving way here. If the pair is able to work through 0.6550, the focus could then shift to the 0.6700-0.6800 area. Still, in this environment, seeing is believing on these breaks as so many technical breaks of late have immediately reversed…and watch out for the Australian employment report tonight as unemployment is showing signs of entering a more rapidly accelerating phase.
