Currencies in Tight Range to End the Week
- China Raises Reserve Requirements
- US and Canada Trade Balance Released
- Into Year End
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China Raises Reserve Requirements
The US dollar and most major currencies were largely unchanged overnight despite a slew of economic data releases. The big event overnight was the release of the Chinese trade balance for November, which came in at 22.9 billion versus expectations of 21.2. While a positive release like this might usually lend itself to a resumption in risk, the Chinese government subsequently raised their reserve requirements for banks by half a percent, pouring cold water on any hopes of a run up in asset prices. The PBoC has used the reserve requirement hike as a way to cool their very hot economy and now the question that begs to be asked is whether or not they will be raising interest rates sooner or later. Later tonight China releases their inflation figures so that will give us a better idea of how urgent a rate hike is. A lot of attention has been put on China of late on speculation that a rise in interest rates will have a major effect on global markets. Over the past few years so much investment has flowed into emerging Asia in the hopes that China would be able to keep the entire region afloat with their exponential growth. This line of thinking has really spilled over into global markets as China is now looked upon as one of the main engines of growth for the world, taking over for the usual suspects the US and Europe. A rate hike would certainly dampen any enthusiasm about the region and could have a big effect on markets in Asia and around the world, a move that would very likely see a pop in the US dollar. With tonight's CPI release coming when markets are closed, we could very well see big movement in currencies when markets open on Sunday afternoon, especially if the number is significantly off the expected 4.7%. Speak to your dealer for the various strategies on offer to help protect yourself from an adverse move in currencies.
US and Canada Trade Balance Released
Trade balances for October were released on both sides of the border this morning, both beating expectations although both are still in deficit. Canada's trade balance came in at -1.7bn vs. expectations of -2.0 while the US came in smartly at -38.7bn vs. expectations of 43.5. The Canadian dollar is marginally stronger on the news today, but still remains mired within its all to familiar range between parity and 1.03. The loonie has been an interesting currency of late, as it seems to be trading more on sentiment than on data. Economic data from Canada has been very mixed of late, with the bias to the negative yet the CAD still continues to defy gravity and remain in this range. Interest rates appear to be going nowhere while bond yields in the US have started their march upward, which should be CAD negative should Canada's rates stay level. The loonie seems to be following the rest of the world so it seems that it will take some major event to shake the currency out of its complacency. The University of Michigan consumer sentiment survey was released this morning, coming in better than expectations at 74.2 vs. 72.4. While this is a widely followed metric, the slight beat on the number has meant that the reaction has been somewhat muted. With no new data releases scheduled for today, currencies will follow the action on US equity indicies for direction.
Into Year End
With the end of the calendar year near at hand, it is always good to take a look at the dynamics that affect currencies as a result of the changing calendar. What we historically see at the end of a calendar year is repatriation of currencies for tax purposes by investors and corporations alike. This phenomenon tends to provide big swings in the value of certain currencies near the end of the year as major flows circulate through markets that are not data or event driven. With the mixture of rising US yields, a (still) large negative bias on the USD and threats of a China rate hike, this year end does have the preconditions for some more positive moves in the USD. As American corporations repatriate their dollars from around the world it can very often have a major effect, especially since a lot of these dollars seem to be in emerging markets at the moment. Any selloff in risk would also be USD positive as the market remains largely short US dollars at the moment, so the moves could be exacerbated by covering of short positions. Only time will tell how this will play out but it is certainly worth mentioning and devising a strategy to deal with any subsequent moves.
Have a great weekend.
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