CAD to China to Copper to FroJo

So the BoC went ahead and did it.  That’s two hikes, and unwinds the cautionary/pre-cautionary hikes of 2016 when oil prices were code blue.

“Recent economic data have been stronger than expected, supporting the Bank’s view that growth in Canada is becoming more broadly-based and self-sustaining.”

They’ve been telling us that for the past two of three years, is it really happening now? Poloz and Co. go on to mention that the global economy is picking up, and more synchronous than in the past--which is also consistent with some of the strong, or at least persistent, growth data out of China, and the spectacular move higher in base metals, which portends continued strong manufacturing growth.

But we haven’t seen much outperformance in CAD….at least not compared to its commodity currency brethren.

The 1.2% stronger move today should put a little space between the loonie and AUD...

And NOK...

And this should leave behind the newly resurgent CLP, which has again crawled out of its low-real-rate grave thanks to the amazing run in copper prices.

As I mentioned yesterday I thought we would see a slowdown in China and metals prices by now that would cause commodity currencies to give up some of their YTD gains. John Maudlin had some good points on this from one of his buddies at “China Beige Book”, a research outfit I’ve never heard of but one that made some very good points on the resilience of the China credit/growth re-boom:

“A lot of this now seems consensus – as all good assessments should in hindsight – but if you recall at the time (mid-to-late June) there was growing sentiment that (1) the economy had already peaked for 2017 and was now starting to slow; (2) deleveraging was having a major effect on corporates; and (3) the commodities sector had likely peaked in Q1 and was now in slowdown mode as well. Our data undercut all of these.”

“CBB data show aluminum firms wildly outperforming the current market narrative, seeing broad Q2 gains in revenues, profits, volumes, output, and new orders, as well as cash flow, which jumped into the black for the first time in our survey’s history. The why is less clear than the what, but one obvious possibility is aluminum is the latest recipient of some of China’s excess liquidity. “

“In Q1, corporate reporting to CBB showed credit tightening was limited to interbank markets. In Q2, it hit firms: bond yields and rates at shadow banks touched the highest levels in the history of our survey, and bank rates their highest since 2014. So why did borrowing not collapse, denting the broader economy? One reason is what we call the “Party Congress Put.” While borrowing did see a mild drop for the third straight quarter, companies’ six-month revenue expectations remain robust in every sector save property. Companies assume deleveraging is transient, likely because they are skeptical the Party will allow economic pain in 2017. It will not be until 2018 when we find out whether deleveraging is genuine – because it won’t be until 2018 that it will actually hurt.”

Bottom line, these guys mention the deleveraging and tightening is hurting property firms and cash flow….but that isn’t hurting the broader economy….yet. When does the other shoe drop? Well, not until well after the party congress at the end of October. Will copper stop its crazy run higher before then?

EMFX and the commodity currency club is poised for continued strength-- with inflows continuing--and yesterday's Brainard comments signaled the Fed is not going to get in the way any time soon.  If inflows persist and start to seep into FDI and the broader economies in commodity driven economies...welcome back to 2005-2006. Canada doesn't seem like a recipient of those flows so long as oil is still stuck in the 40s, but that theme should be intact for those driven by base metals in Australia, Chile, maybe even South Africa. Low natgas and oil prices will benefit those countries too...as well as soft commodity exporters like Argentina.

What else is going to throw sand in the gears? North Korea? the ECB? A trade kerfuffle or a NAFTA trainwreck? Not seeing any likely culprits here.

Back in the Atlantic, no macro opinion on the natural disaster front...just prayers to everyone in the path of Hurricane Irma.

Took me a sec to realize that was what was driving frozen concentrated orange juice futures.

At first I thought it was the Dukes. Which I say just to have an excuse to post this, which I think every trader should be required to watch as a part of his or her training.

Stay safe out there!!

Shawn
TeamMacroMan2@gmail.com

@EMInflationista