China Data Leaked

Chinese Data Leak Benefits Aussie, Euro, Sterling

Risk was well bid overnight as world stocks rose to levels not seen in just shy of two and a half years. Apple released strong results and the outlook for the future is rosy given sales of the iPhone and iPad; meanwhile, IBM also impressed by delivering a better-than-expected profit on the quarter. That being said, there were some mixed results out of Goldman Sachs and Wells Fargo, which has contained the elation-driven buoyancy somewhat this morning.
In Asia, there were reports out of Hong Kong that Chinese inflation data, which will be heavily viewed this evening, is slated to come out on expectations. We’ll see if this leak proves to be true, but calming inflation in China is very positive for stocks and risk trades because it means that the government may not have to impose more tightening rules to curb growth and rising price pressures.  The CPI data will be read at 9:00pm EST tonight, and if the levels deviate from the 4.7% expected (or 4.6% leaked), it will likely play a major factor in the night’s—and the rest of the week’s—sentiment.
The leak, combined with the after-the-bell earnings releases, made investors rather bullish, which saw them moving away from the US dollar to invest in emerging markets and equities rather than in bonds. The Australian dollar was one of the biggest winners on the day, cruising through parity with the US and now sitting up roughly 0.6% on the day. The EUR actually gained even more and is up close to 1% as fears over the debt problems have taken a backseat for the time being. The common currency continues to climb and now sits close to 1.35 in interbank trade. Though it is above the top end of its range, more gains could be in store if this mood continues. And finally, in the UK, the pound is struggling to remain above the 1.60 mark. It has traded above this figure a few times in the last couple of days, but seems to be consistently met with decent offers, and now sits just under this important level. Similar to the Canadian dollar (see below), traders are hesitant to push it too much higher after the gains witnessed recently. The crosses might have to catch up to the pound before it can push significantly higher against the USD.
Loonie Left Out of Risk Rally
I’d like to talk a little bit about the Canadian dollar. We highlighted the importance of the Bank of Canada decision yesterday; it is interesting to analyze the price action a day later. As noted, most currencies gained against the Big Dollar overnight due to data and risk preference, but the Canadian dollar has lagged considerably. This is both a follow-through from the less-than-hawkish statement released yesterday and proof that, with this move under par, the market has established a “fair valuation” for the near term. At these levels, there are more attractive buys in the market if you want to short the US dollar, but there is also a pervasive belief that Canada should be strong due to its fiscal situation and generally optimistic outlook.
The Bank did note that currency levels might be a drag on the economy, and this is certainly helping to fuel the anti-CAD sentiment today, but the volatility and interest in the currency has waned, leading us to believe that either new data or relative prices with the crosses must change before we see significant changes. On a more technical note, the USDCAD pair posted a bullish outside reversal today, so if the day’s price ends higher than yesterday’s close, it could signal that more short-term weakness is in store for the CAD. That being said, we do feel the general trend is in place, and any significant devaluations in the Loonie will be met with decent buying interest given the fundamentals in Canada.

China Buying Euro, New Year

Rumours of China Buying Supports Euro

The Euro got a much welcomed helping hand from China of all countries overnight, after news reports surfaced that China was going to buy between 4 and 5 billion Euros worth of Portuguese debt. The reports went on the state that the deal had China buying in both the primary and secondary markets through Q1 of 2011. The news was much needed relief for the Euro which has been under siege this week.  Talk from ratings agencies of further downgrades to peripheral countries in the EU has weighed heavily on the common currency which bounced off of fresh all-time low against the Swiss Franc and Australian Dollar following the reports of China buying European assets.
While the China reports are a faint sliver of hope for the EU, further softness in the Euro is expected as we close out the year. Simply put, the problems in the EU are much, much bigger than 4 or 5 billion Euros, and at this point, the root causes of the debt concerns don’t appear to have been resolved. In fact it feels eerily like the end of December 2009 with all of the negative sentiment currently surrounding Europe. With thin holiday trading taking hold in the markets, jumpy and erratic movement is expected, as lower volumes will see imbalances created in the market whenever larger transactions occur. However speculators minds will be focused on friends & family at this time of year, rather than jumping into the markets with their billions of hedge funds dollars. This is likely to have a calming effect which will keep ripples in the market from growing into waves.
British Growth Forecasts for 2011 CutIt was reported that Quarter-over-Quarter GDP is down in Q3 to 0.7% from 0.8% the preceding quarter and the Current Account deficit grew to GBP 9.6 billion in Britain during the European session. Trade was widely expected to help push the British economy into a period of recovery, however so far is only acting as a drag on growth. In response to this new data the British government cut is growth forecasts for next year.
 Adding another dimension to the situation, the current government has pledged to get a handle on Britain’s largest ever peacetime deficit. Plans include cuts to spending by GBP 81 billion and a further GBP 29 billion in new taxes. However analysts have noted that growth has not picked up the way policy makers had hoped, and inflation remains well above the target 2%. This situation potentially leaves the Bank of England little in the way of manoeuvrability should it need to step in to control the runaway inflation. British business associations have also been quick warn against pulling support out of the economy too quickly. Given the concerns that tight fiscal measures may jeopardize the current recovery in the United Kingdom, the opposition, not wanting to miss the party has jumped in and accused the government of cutting too deep too quickly. It’s a rocky road ahead both politically and economically for a coalition government that is already struggling.
The Day and Week AheadExisting Home Sales in the US is out this morning with expectations around 4.72M. Tomorrow is a little busier in the North American Session, with: Canadian Q3 GDP (market expectations are around 0.3%), weekly US Unemployment Claims (always exciting), US Core Durable Goods orders for the month of November, and US New Home Sales. A strong number in today’s Existing Home Sales would be the third month of growth in the last four. Coupled with a strong New Home Sales number tomorrow, it would support the growing notion that the housing market in the US may be turning the corner after the sub-prime mortgage disaster. Friday has nothing of importance on the docket as it is the last day before the Christmas weekend, generally the beginning of the quietest period of the year in money markets, which ends on the first business day of the New Year.