Dollar surges as China growth fuels demand

A series of glowing economic reports from China served to raise expectations that the central bank faces more hard work in the year ahead. Higher than expected growth in the nation simply worried investors in to a belief that there is now a greater risk of tighter monetary policy. En route demand for riskier assets fell by the wayside as equity prices took a beating. Demand for both dollars and yen rose.

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U.S. Dollar – China’s economy in 2010 grew at 10.3% at the fastest rate in three years with fourth quarter data delivered today accelerating compared to the prior quarter rather than responding to ongoing remedial measures from the central bank. The data is likely to show that the Chinese economy officially produced more in dollar terms than Japan when its data is released next month. Price pressures cooled as the year-on-year gain eased to a 4.6% pace, but according to analysts was likely lowered by base effects from a year ago, which will force a spike in inflation within a couple of months. The current expectation is that consumer costs will accelerate to 6% in the first half of the year. In other data the economy showed ongoing strength with retail sales and industrial production exhibiting more of the same. The dollar index remains curiously lower although the dollar’s loss appears explained solely by losses to the single European currency at this stage. Later today investors face the release of initial jobless claims, which will gave the latest assessment of the health of the labor market. The market expects a drop of 25,000 to 420,000 first-time unemployment benefit claims.

Aussie dollar – The Aussie lost 0.7% and is the biggest casualty of the dollar’s safe haven bid this morning. The close-tie between its fortunes and the performance of the Chinese economy remain the driver in Thursday trading. With dealers pricing in a 1% increase in the 12-month loan rate by the Peoples Bank of China, investors are clearly concerned over the impact of fresh measures to cool the economy. The gradual pace of monetary tightening is not yet done, while the authorities appear to be sponsoring a fresh appreciation of the yuan. The central bank has also tightened reserve requirement ratios thereby crimping banks’ ability to lend. It’s unlikely that the remedial measures will cause too much harm to the economy of Australia, but currency traders like to wear their hearts on their sleeves in response to news like that served up today. The Aussie stumbled above parity making a beeline for a session low of 99.26 U.S. cents where it continues to look uncomfortable. In domestic news a report showed a surge in consumer inflation expectations during January as they rose to 4.8% from 2.8%.

Canadian dollar – Courtesy of its affiliation with commodity prices the Canadian dollar also fell and was dragged towards its lowest in two weeks against the dollar. In early New York trade and ahead of Canadian reports including a leading index of business sentiment and wholesale sales for the month of December, the loonie inched towards parity with the dollar. Metals along with other commodity prices fell in response to the prospects for a deliberate reduction in Chinese output also weighing on the Canadian unit.

Euro – The initial response to the Far Eastern data was a loss for the euro to the dollar towards $1.3418. However, a strong reading for German producer prices inspired euro bulls to hop straight back on to the inflation bandwagon. Data showed a 0.7% boost to prices paid by factory owners for the month of December, meaning it was the strongest increase in seven months. Buyers of the euro used the recent hawkish line used by central bankers to drive it back to $1.3523 at its best before gains were pared. Elsewhere November data showed industrial orders for Italy unexpectedly slumped 4.3% accompanied by a negative downgrade for October output. The report contrasts with the fortunes for the heart of the Eurozone.

Japanese yen – Weakening Asian units in response to the fear of a tighter Chinese policy stance sapped demand for the yen, which slipped to ¥82.35 in early New York trading. The yen also eased per euro to ¥110.95 although it made gains against the Aussie to ¥81.67. A November coincident index rose albeit marginally to 102.4 while a leading indicator pulled back but again, only marginally.

British pound – The pound faces a mixed day having earlier fallen in response to the shock of strong Chinese data. The pound is in danger of breaking a nine-day winning streak versus the dollar that has seen it rise 3.4% to above $1.6000. A recent drop in investors’ appetite for equities around the world has seen risk appetite at least plateau, which is also making them think long and hard about the outlook for the pound in light of its recent ascent. Today the unit rebounded from an earlier low at $1.5909 to stand at $1.5973 ahead of U.S. data. The euro also rose against the pound to buy 84.31 pence.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

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.

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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