China to beat Bernanke in hiking rates first

[mserve id=”Central_Bank_PBOC.jpeg” align=”left” width=”250″ caption=”People’s Bank of China ” alt=”Peoples Bank of China PBOC Central” title=”People’s Bank of China”]

The first trading session after NFP never fails to deliver its lack of excitement. North America historically experience the quietest trading day of the month after its employment reports. Again, we were not to be disappointed. Now that is out of the way, expect to see some consolidation for the dollar. China for the second time this week have raised Bill rates to curb lending, this is a strong indicator that they will raise the benchmark interest rate in the first half of the year. ‘The nation is on guard against inflows of speculative capital that may stoke inflation and create asset bubbles’. China is trying to curb their lending, which technically tends to be the highest this time of year, before a bubble bursts.

The US$ is stronger in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Lack of fundamental data yesterday helped the dollar to achieve several lows against various trading partners. However, after reaching monthly lows, the currency seems to be consolidating if not paring some of its losses in this morning’s trading session. Analysts at China’s Investment Corp Asset reallocation department believe that the greenback will not last longer as a source for carry trades. Technically, after the sharp EUR move because of a weaker NFP print, the consolidation this morning is convincing various traders that the EUR at 1.4500 is a ‘false break’. Does the EUR have the momentum to rally? The market is long after last weeks breaks, perhaps its time for the dollar to shine.

The USD$ is currently higher against the EUR -0.25%, GBP -0.02%CHF -0.32% and lower against JPY +0.21%. The commodity currencies are mixed this morning, CAD +0.01% and AUD -0.55%. Unlike its US counterpart, Canada was dealt a plethora of fundamental data yesterday with mixed results. Canadian housing starts increased to its highest level in 14-months last month (+174.5k vs. +164.8k, m/m), mostly on the back of increased single and multiple-family units. Cheap borrowing costs continue to support the demand for homes. This should be a positive contributor to 4th Q GDP. Other data showed that building permits surprisingly fell -4.6% in Nov., led by non-residential projects while housing permits continued to grow. Similar to last week’s employment report, the decline followed a high benchmark print in Oct. (+20%) where builders took advantage of the lowest mortgage rates in 50-years. Of late, the BOC has been vocal in their concerns that consumers could be taking on too much debt. Despite this, Carney and his fellow policy makers have pledged to keep O/N borrowing costs at a record low (+0.25%) until June at least, unless inflation takes a turn for the worst. Finally, the BOC Business Outlook Survey reported near record optimism about Canadian companies future sales. Close to +70% of executive’s responses were positive. Even with the dismal dollar and stronger commodity prices, the loonie managed to pare some of its recent strength as speculators believed the currency has come too far too fast. Traders and speculators have been using any USD rally to increase their long CAD exposure citing a stronger risk tolerance as the primary reason.

The AUD felt the pressure last night, falling from its two-month high, after a report showed home loan approvals dropped in Nov. by the most in 18-months. The RBA’s Governor Stevens has hiked rates three times since Aug. (3.75%). Not helping matters was the PBOC again hiking bill rates to slow down lending. China is trying to put the breaks on lending which will have a direct effect on the Australian economy. Stronger fundamentals and robust commodity prices have kept the RBA on their toes regarding tightening monetary policy again next month. 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. (0.9268). 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.

Crude is lower in the O/N session ($82.08 down -44c). Oil prices have been like the ‘energizer bunny’, they keep on going. The commodity managed to print a 15-month high yesterday, aided by a weaker greenback and strong trade data from China at the weekend. Throw in a global cold snap and the market has the capability to ignore the bearish US weekly fundamentals last week. Despite a disappointing NFP, China (the 2nd largest energy consumer) reported 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. Stockpiles increased by +1.3m barrels to +327.3m vs. an anticipated -300k decline reversing 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 eventually pressurize prices. China consistently reports month after month stronger oil consumption and its becoming expensive to bet against their demand at present.

The ‘yellow metal’ advanced to a one month high yesterday as a weaker greenback increased demand for gold as an alternative investment decision. Stronger Chinese trade data on the weekend has provided evidence of a global economic recovery in play. Traders expect gold to maintain its bullish momentum for the remainder of the week. Again, if one wants to own the ‘yellow metal’, they would be better off crossing it with the EUR or GBP to hedge out the dollar exposure that is present in a long gold position in USD terms ($1,154).

The Nikkei closed at 10,879 up +80. The DAX index in Europe was at 6,000 -38; the FTSE (UK) currently is 5,517 down -20. The early call for the open of key US indices is lower. The US 10-year’s eased 3bp yesterday (3.80%) and another 3bp in the o/n session (3.77%). The front end of the yield curve remains better bid after last week’s weak NFP data. Futures traders have been increasing their bets that the Fed will keep rates at a record low for an ‘extended period of time’. The 2/10’s spread widened out to new record of 289bp. This week the Treasury will sell $40b of three-year notes today, $21b of 10-year securities tomorrow and finally, $13b of 30-year debt on Thursday. 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 last holiday period.

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