PBOC is proactive, Bernanke’s Fed is reactive

For many observers, China is the unknown factor in global economic growth. It has been leading world markets for the past 18-months. In layman’s terms, they have been ahead of the curve in most aspects. The Shanghai composite index bottomed in Nov. 2008 and topped out in Aug. 2009. Perhaps this is an omen for the Dow? Currently the PBOC has begun its monetary tightening program (hiking bill-yields and raising bank reserve requirements) well ahead of the ‘former’ leader, the Fed. Their actions will pressurize investors to pare their risk and carry trades and perhaps dissuade traders from using the dollar as a ‘funding currency’. Or will it be this ‘seasons earnings’ that change the whole landscape of thinking?

The US$ is stronger in the O/N trading session. Currently it is higher against 11 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Yesterday’s US Trade numbers disappointed, but it was not that surprising (-$36.4b vs. -$34.6). Exports advanced again and the stronger import print should be considered a signal for domestic strength. However, net trade looks like it will be a non-contributor to 4th Q US real-GDP growth, despite the renewed export strengths as accelerating import volumes should offset these gains. One should not always consider imports as a negative variable. In reality it should be treated as a positive sign of any domestic economy improving. Digging deeper, nominal exports advanced +0.9%, but was immediately cancelled out by a +2.6% rise in non-price-adjusted imports. This is what led to the larger deterioration in the headline print. It’s a given that oil would be a variable. Higher oil prices were a part of the higher import volumes. Real-goods exports fell -0.6%, but remain a plus for the quarter, while real-goods imports rose +1.5%. Imports gains were broad-based and in line with recent gains in retail sales and overall consumption. Auto’s, apparel, food & beverages were down on the month. Capital goods jumped +3.8%, m/m, while industrial supplies advanced +5.1% (mostly on gains in crude oil imports). Finally, consumer goods managed to post its largest increase in 7-months.

The USD$ is currently higher against the EUR -0.05%, CHF -0.26%, JPY -0.54% and lower against GBP +0.27%. The commodity currencies are higher this morning, CAD +0.10% and AUD +0.47%. Yesterday, surprising Canadian Trade data kept the loonie under pressure. It was also aided by weaker commodity prices. The trade balance fell back into deficit territory (-0.3b vs. +0.5b), unexpected, however the underlying story is not as bad as the headline print would suggest for three reasons. Firstly, exports continued to rise (3rd-consecutive monthly gain). Secondly, one notices that imports advanced +4% and this after a quarter of weakness, mostly on the back of autos and energy. Analysts will point out that imports are technically a drag on real GDP, but, on the plus side, its proof of an accelerating domestic economy. Finally, analysts expect 4th Q net trade to contribute positively to real GDP because of Oct.’s price adjusted export gains. Digging deeper, exports rose +1.1%, m/m, in Nov. This was largely on the back of agriculture (+3.5%), forestry (2.5%) and mostly the energy sector. Without energy, we would have witnessed a decline of -0.3%. Imports on the other hand, jumped +3.9%, m/m (first gain in 7-months). The currency managed to depreciate against most of its major trading partners catching the market long the loonie. Traders continue to be better buyers on dollar rallies. However they are keeping a close eye on commodities, especially oil. The BOC meets next week and they continue to be vocal on their commitment to keep rates low. The market requires a healthy corrective dollar strengthening. Ideally, we should be looking for loftier heights to own the currency.

The AUD did a u-turn in the O/N session and rallied towards it two-month high in advance of a stronger employment report that appears this evening. Analysts expect +10k new jobs to be added. However, the demand for the currency has been limited after China yesterday raised banks’ reserve requirements by 50bps. The AUD will continue to be at the mercy of global sentiment and commodity prices. Stronger fundamentals and robust commodities 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. (0.9249). 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 ($79.93 down -86c). The battery has died, the energizer bunny has stalled and oil prices have retreated for a 2nd consecutive day yesterday in anticipation that warmer weather is expected along the eastern sea board. This will curtail the demand for the black stuff temporarily at least. Fundamentally, the world is awash with oil and demand destruction again will become a factor. Already this week the commodity has managed to print a 15-month high, aided by a weaker greenback and strong trade data from China at the weekend. One of the reasons for elevated pricing of late is China (the 2nd largest energy consumer) reporting that they had increased crude purchases to a record last year to meet rising demand boosted by the government’s stimulus spending. Yesterday’s announcement that Chinese authorities are trying to curtail lending has investors questioning the immediate strength of a global recovery. Last week, US crude inventories rose for the first time in a month. Stockpiles increased by +1.3m barrels to +327.3m 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. Refining capacity utilization fell -0.4bp to +79.9%, its lowest level in 5-weeks. Today traders expect inventories to have increased for a 2nd consecutive week. The capital markets currently are not focusing wholly on market fundamentals, but on the value of the dollar for the time being. With the cold weather expected to improve, fundamentals will eventually pressurize prices.

Already this week the ‘yellow metal’ has managed to print a new monthly high ($1,163) as a weaker greenback increased demand for the commodity as an alternative investment. Yesterday traders took it upon themselves to book some profits after the +5% rally this month, paring -2% off the opening price. It was the largest intraday loss in nearly 3-weeks. Even after its losses, traders expect the metal to maintain its overall bullish momentum for the remainder of the week and are better buyers on these pull-backs ($1,132). Of course this will all change if the greenback can gain any traction.

The Nikkei closed at 10,735 down -144. The DAX index in Europe was at 5,953 up +10; the FTSE (UK) currently is 5,484 down -14. The early call for the open of key US indices is higher. The US 10-year’s eased 4bp yesterday (3.73%) and are little changed in the O/N session. Despite auctioning $84b’s worth of new product this week, treasuries remain better bid as China, for the second time since the weekend, moved to curb bank lending. This has led to investors speculating that slower economic growth will boost demand for US FI product. Investors are worried that 4th Q profits will disappoint and lead to the 2/10’s spread narrowing further. Yesterday it had narrowed by 4bp to 289bp. The three year auction was well received because of global growth concerns. Direct bidders (non-primary dealers), bought +23.5% of the notes compared with an average of +6% at the past 10 offerings. The Treasury will sell $21b of 10-year securities today and $13b of 30-year debt tomorrow.

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