Forex report: Yuan/dollar connection

Commodity prices continue to accelerate to start the week after it appears that there was little hope that U.S. pressure on the Chinese authorities would allow for an appreciation of the Chinese yuan. The weekend APEC summit in Asia saw international leaders meet, with President Obama then flying off to Beijing, where limp expectations for a move from the Chinese were likely to be dashed. The picture of Chinese officials appearing to bow to international pressure is unlikely to sit well domestically, while the Chinese would rather allow the yuan to strengthen gradually over time and only when China is ready to do so.

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APEC issued a statement over the weekend promising to maintain the foundation of economic recovery and promised not to remove government measures to stimulate growth. Meanwhile a Chinese commerce ministry spokesman refuted any international pressure on the yuan as unfair, saying that yuan strength “is not conducive to a global economic recovery.” The preferred path for China is a prudent policy from which it can provide stable and predictable macro economic and exchange rate policies.

The yuan link to the U.S. dollar means that the Chinese must suffer discomfort as the greenback weakens. China’s export competitors don’t benefit from the same advantage when the dollar weakens and indeed most competitors are likely to face the opposite problem of strengthening relative to the dollar and therefore yuan.

In other news over the weekend, a Chinese banking official accused the U.S. of funding the mother of all carry trades with its ultra-low monetary policy that was creating speculative flows into emerging and domestic markets. The banking regulator said that the U.S. policy was unsustainable and would break the back of emerging nations who were merely feeling the benefit currently of excess government stimulus. As those government measures abated economic worry and pressure would emerge to ignite economic woes ahead.

The dollar lost ground to begin the week. Japanese second quarter growth was twice as strong as had been expected at 1.2% for the quarter, translating into a 4.8% annualized basis. The dollar slipped against the yen and buys ¥89.52, highlighting a further broader-cased slide in the value of the dollar index this morning. Domestic Japanese growth helped underscore the economic recovery in the Asian region.

The euro has gained ground to $1.4973 overnight and is up half a cent since Friday’s closing price. Against the Japanese yen the euro gained to ¥134.03 highlighting slightly stronger risk appetite around the globe. Pre-market stock index futures were firm ahead of key data on U.S. retail sales, which are expected to rebound from September’s weakness in the aftermath of the government cash-for-clunkers program.

The pound has again climbed against the dollar and is currently starting the week at $1.6727, while against the euro sterling is a shade lower with one euro buying 89.42 pence. Last week’s Eurozone GDP data highlighted the relative recovery process between the two economic zones with Britain clearly lagging. That’s possibly due to its heavier financial service sector reliance, which continues to clog the economic arteries. Today a housing report showed that Britons accepted reduced buying prices for homes, which during October fell 1.6% compared to September’s 2.8% advance. That was the first time in three months that house price data reported a decline.

Another record price for gold bullion, which reached $1,133.20 per ounce in early trade on Monday helped inspire the Canadian dollar, which rose to purchase 95.74 U.S. cents. Gold, which has long been seen as a counter-dollar play does seem to be coming into a new class all of its own. Demand for gold from central banks appears to stem from more than just a broad based downdraft for the U.S. dollar and is set against a backdrop of declining mining production and reserves. In other words the fundamental backdrop appears to draw a line of support under the price of the precious metal, which is still well below its inflation adjusted peak in the 1980’s. Its price would have to practically double to allow for price increases.

The Australian dollar was equally inspired by rising appetite for commodity prices. As long as it remains impossible to separate the Siamese twins of demand for commodities and the government stimulus that stands accused of inflating raw material prices, the Australian Reserve Bank will continue to raise interest rates and buoy the appeal of its dollar. The Aussie also gets a kick today out of the Japanese GDP report, which highlights growth in the Asian region.

The U.S. retail sales reading for October showed almost twice as much strength as had been expected. Sales rose at a 1.4% monthly clip, with the immediate impact being to boost the fortunes of the dollar. However, its appeal remains precisely where it was before, which is dim on account of the likely longevity of monetary and fiscal laxity.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

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About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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