by Nick Nasad
To end this week's trading we saw the USD gaining following a blow-out US Trade report. It begs the question is the USD recovery for real?
Overnight, the USD was softer as yields had fallen to end Thursday's US trading on a 30-year auction of US Treasury action that saw good demand. The main stories overnight was a positive Chinese trade balance report but also another 50 basis point bump up by China's central bank of the country's bank reserve requirement ratio. It's the 3rd time they've done so in the last month, and that rate is now at 18.5%. This is meant to mom up excess liquidity.
In Europe, there has been little headway in terms of crafting a long-term solution for the sovereign debt crisis, and Euro-zone periphery country's yield spreads with Germany rose yet again. That pressured the Euro.
Coming into the NY session, the USD was soft but ready to gain if the trade balance report came in better than expected. And did it. It was the best figures since January as exports rose to a 2-year high. Also we had a second report showing US consumer confidence increased in December. The trade data is a positive for US growth and it helped to increase demand for USD on a "US recovery story."
US Trade Data
Let's talk a bit more about the trade data. It shrank more than forecast as a weaker dollar and strong demand from emerging markets helped increase exports. As I mentioned exports hit a 2-year high. Overall the trade gap totaled $38.7B – the lowest since January, which was lower than the lowest estimate of 78 economists surveyed by Bloomberg. That was a 13.2% smaller deficit than in September ($44.6 billion).
Exports rose 3.2% to $158.7 billion in October, the highest level since August 2008, just before the start of the global financial crisis and subsequent recession. Exports to Mexico and China were at record amounts and also strong demand from other countries like Brazil and South Korea.
Imports fell 0.5%.
This report is important because trade has been a strong net negative on US growth. Trade chopped a whopping 3.5% out of growth in the second quarter and was a 1.8% drag in the third quarter. TD Securities strategists said U.S. GDP in the fourth quarter is now likely to rise by 2.6%, compared with a previous forecast of 2.1%, after the report. And trade if not a net positive, will not take off as much growth as it did earlier in the year.
China Trade
Speaking of trade data, I did mention China trade balance, which came in better than expected as well.
The surplus for November stood at $22.9 billion in November, shrinking from $27.1 billion in October but coming in above the $22.3 billion surplus expected by analysts.
Exports jumped 34.9% in November from the year-ago period. That was higher than the pace in October, and much higher than the 22.4% increase expected. That's a strong signal for global recovery.
But imports grew at an even faster pace, 37.7%, ahead of October's 25.3% increase and expectations for a 24.5% expansion. That shows that China is starting to consume more, some of that badly needed global re-balancing we had talked about during the G-20 meetings a few weeks ago.
Over the weekend we get plenty of Chinese data including an important inflation report. There is always the chance the central bank could raise interest rates as well. So, important to gauge what happens with the news there over the weekend.
US Consumer Confidence Improves
Back to the US, we had also a gauge of U.S. consumer sentiment rise to 74.2 in early December from 71.6 in November. Despite the gain in December, the gauge is below pre-recession levels of more than 80. While there have been some signs of improvement in the economy, consumers remain concerned about jobs.
In a separate report import prices were shown to have climbed more than expected in November. The report raises concerns about about inflation.
Is US Recovery Story For Real? And What About USD Strength?
There are some things to like about the USD: better data, higher yields, and some defensive safety buying visa-vie China.
The recent stream of US data has been positive – consumer spending number have been good and today we saw confidence rising as well, the ISM manufacturing report showed that sector expanding, and now exports hit a 2-year high. Also, falling jobless claims should tell us that the labor market is in a better state than the clunker of a number we saw in the Non-Farn Payroll report – the monthly US jobs report. With the announcement of an extension of tax cuts in additional to stimulus measures such as unemployment benefits, credits for companies to invest, and an extension of stimulative tax credits for the middle class. That has added an extra point perhpas to US growth. If exports remain strong and trade stops being such a major drag on the economy then we could see the recovery gain momentum in the 1Q and 2Q of 2011.
A stronger recovery would ease the pressure on the Fed to keep loosening monetary policy, with some quarters talking about possible QE3, and Bernanke himself mentioning it in an interview in 60 minutes.
Which story dominates, a recovery in US or looser monetary policy? The two go together in that a stronger economy means the Fed can perhaps stop at the $600 billion they allocated for QE2.
Let's now turn to our main currency pairs.
EUR/USD – Saw EUR/USD, which traded sideways overnight, move in favor of the USD following the trade data and hit a low for the day after the consumer confidence data. The market than retraced a good deal of the break below 1.3250, and we conform to a downward channel.
USD/JPY – After surging to start the week, a 200 pip move to resistance at the 84.30 area, the USD/JPY retraced its steps, falling down to its 38.2% fibonacci retracement level. Today, in the wake of the possible trade report, the USD/JPY rose to 84 and stayed near there around noon NY time.
The story this week has been US Treasury yields. Yields surged early in the week, consolidated following some auctions by the Fed of 10-year and 30-year notes and bonds, and yields rose again today as the prospects of a stronger US economy lessened demand for the "safety" of Treasuries. November has seen a strong sell-off in US Treasuries, as we know prices and yields move inversely of each other. So as traders and investors are selling US bonds, yields have been rising.
Will US yields continue to climb? If so, the USD/JPY will rally. If not, we may continue to consolidate between 84.40 and 82.80, and lower than than 82.30.
GBP/USD – The GBP/USD has had a strong week, unlike the EUR/USD, showing a rising channel. Today, after hitting a high near 1.5860, about our channel resistance, we fell in the wake of the trade balance data. We found support at 1.5750. From there, like the EUR/USD, the greenback gave up a good chunk of its gains, and we traded around the middle of our day's. UK data has been better than expected as well, so it has been performing better than the EUR.
AUD/USD – Looking at one of our commodity currencies – the AUD/USD – not that interesting today, likely pushed down by the China bump to its bank ratio requirement. We gained overnight actually, as the trade data from China helped increase optimism for the region, but here too the USD had some gains in NY trading.
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