Tuesday, March 10, 2009

Has the Euro Become An Instrument Of Chinese Policy?

Macro Man is back in the saddle after being bed-ridden with the flu yesterday. He's not really sure what to make of the fact that he had the most site hits in more than a month on a day on which he wrote nothing. Perhaps word got round that the site was more insightful than usual yesterday...

Regardless, he's back, and it seems as if little has changed over the past few days. Equities still trade dreadfully, bonds are still unimpressive given equities and the economic data, and EUR/USD is still 1.27 +- two and a half cents. This is market that's tailor-made for topping and tailing one's self. so Macro Man is trying very hard to avoid falling into that trap.

The first snippets of February economic data are beginning to emerge from Asia, and for a China sceptic like Macro Man, the figures are decidedly unimpressive. In Taiwan, exports fell 28.6% y/y, worse than the expected 26.2% decline. "But wait!" he can hear you exclaim. "They were down 44% last month! Surely that's an improvement!"

Welcome to the wonderful world of seasonally adjusting Asian data early in the year. In most years, including 2008, the Lunar New Year (when many Asian countries have a full week's holiday) falls in February. This year, however, it was the last week of January. So this "improvement" in the February export data came in comparing February 2009, with 20 working days, against February 2008, which had but 16, despite being a leap year. And exports were still down by more than a quarter. You can clearly see the "New Year bounce" on the chart of export data below, including in 2004, the last year that the New Year week fell solely in January. However, the bounce is conspicuous by its absence this year, even though February had 5 more working days than January.
Also telling was China's CPI data, which crashed to its lowest level (-1.6%) since the inflationary aftermath of the Asian crisis. Some of this is of course down to base effects; nevertheless, those effects are set to last for another 5 months, so risks are heavily skewed to more negative prints.
And so, might China accelerate its deflation-fighting policies? One obvious thing would be to weaken the currency; however, letting USD/CNY drift higher is fraught with political peril, given America's sensitivity to the rate. (And not without cause, mind you; near-record trade surpluses are hardly suggesting the RMB is anythign but weak.)

Then again, the RMB has appreciated most against the euro over the last couple of quarters. Given that a) Europe is just as important to Chinese trade as the US, and b) for whatever reason, the Europeans like to moan more about the EUR/USD rate than what China does, might it make sense for China to try and weaken the RMB against the euro?
Perhaps that's why Voldemort was once again fingered as the euro buyer in Asian time overnight. At the very least, it's probably why 1.25 has been such a tough nut to crack. Not that the level might not fall eventually; de-leveraging flows could and probably will overwhelm the Voldemort bid eventually.

In the meantime, however, market price action is likely to remain as noisy as one of the rockets they shoot off to celebrate that Chinese New Year.


Anonymous said...

about macro site high traffic: perhaps it was because people awaited for your daily post and kept refreshing once in a while.

Macro Man said...

Yes, I suspect (or at lest hope) that that's the answer...still, I thought it was funny.

Anonymous said...

MM, what chance would you put on a further rout on GBP (I guess triggered by the need for additional QE)?

- CS

CV said...

@ anon 9:41 (and MM)

You are bang on ... I came here 20 times yesterday :). Usually, MM's daily is up at about 10-12 (GMT+1, Copenhagen) and imgaine my surprise when that was not the case yesterday.

In any case, good to have you back. That was a speedy recovery from the flu too.


Anonymous said...

personally, i came here 5 times looking for your daily dose of wisdom -- i guess everybody did and that might explain the traffic.

get well!


Anonymous said...

Anon 9:41 and MM..

Dont know. IYesterday was the first day in over an year when I did not came here after being caught in another work. Bang..there was no comments! Whew..That was a good recovery from flu and here's wishing continued good health! I love your perspective MM on Global macro!

From India.

FX said...

I think it's cute how you give China and Co. such props as FX vigilantes. My experience is that FX in the short term is very irrational, and attempts in hindsight, to lay blame are normally very entertaining, but rarely fully accurate or provable.

Sure, china wields a big stick, and the sales people who cover them love to run at the mouth, but its hedge funds, retail( surprisingly big), and prop desks that drive FX day to day.

Also isn't China saving its pennies right now for internal spending and stimulus packages? (just guessing)

Anonymous said...

any thoughts on KRW

Macro Man said...

FX, are you based in North America by any chance?

Anon, re KRW: not really. The bull trend in USDKRW has run out of steam for the time being, and today's correction could extend a bit further. But to my mind it is still a correction, and we are likely to see higher levels before too long. Then again, from a longer term perspective, it is looking pretty cheap against the yen, its major competitor currency.

SO...I am flat, think USD/KRW is higher in 3 months, but could see JPY/KRW quite a bit lower in the medium term.

Anonymous said...

"He's not really sure what to make of the fact that he had the most site hits in more than a month on a day on which he wrote nothing"

You're always punctual with your daily entries and many read your day-to-day report as part of their morning routine.

No doubt a lot of people rechecked the site throughout the morning to see if you posted...my best guess.

Anyways, glad to see you back in the saddle and I wish you a speedy recovery from the flu.

Yohay said...

I use RSS for following new posts. That way, I don't need to refresh...
The Euro is getting stronger also against the falling Pound. EUR/GBP parity can be seen again.

Anonymous said...


Any thoughts on the INR against USD?

From India.

Macro Man said...

Not really, same sort of profile as KRW, I think...may correct a bit more, but suspect we see USD/INR higher on aggregate over the next 3 months

Anonymous said...

haha, thanks for a nice laugh when i read about the site hits!

i did check back as well, thinking wow something big is happening that prevented the post adn m-m will finally let us know...i don't like rss feeds

we're had some MAJOR stock market turns in march, such as the march 2000 high and we're on the anniversary of 2003 low now, and we're a gann 90 months from 9/11/01 and we're in a full moon to spring equinox window

bulls are trying, reason for squeeze the citigroup ceo memo that 'jan/feb both months profitable'

-cheers, left coast(or left out) deac

Anonymous said...

ben is up!!

Chinese consumer prices in February fell for the first time in more than six years with the benchmark consumer price index falling 1.6 per cent from a year earlier, down from a 1 per cent rise in January.

The drop marked the tenth consecutive month of moderating price rises and compares with an 11-year record rise in the CPI of 8.7 per cent last February, when food and energy prices were soaring.

Beijing has targeted headline inflation of 4 per cent this year but many analysts say the government will struggle to meet that target and will have to act quickly if it is to avoid a period of prolonged deflation.

“The government must find new growth drivers to replace exports and housing or face the risk of a ‘W-shaped’ recovery and a more durable deflation problem,” said Ben Simpfendorfer, an economist with RBS in Hong Kong.


Anonymous said...

Closed most of my risk shorts on friday (cept € and crude) and reversed a couple too, fwiw. Think we bear rally here as S&P too sluggish on the down move.
Swings on €$ a little dangerous as you mentioned so keeping it light, 1.25 break continues to frustratingly elude us.
I too am an RSS man, but had to check the site as the ever reliable MM missed a day unannounced!
Hope all well, and best of luck to all. JL

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