Does this bring out the optimist in you?

Key News

    • China Set to Impose New Tariffs on Nylon — The ruling affects imports of Nylon 6, or polycaprolactam, which is used to manufacture a variety of products, ranging from toothbrushes to gun frames to chiffon. Starting Tuesday, China will require importers to pay deposits on Nylon 6 imports from foreign companies judged to be selling the material in China for less than a fair price. (Wall Street Journal)
    • Bernanke Warns on Imbalance Risks — Ben Bernanke said on Monday that it was “extraordinarily urgent” that the US and Asia adopt policies that prevent a revival of global economic imbalances as the financial crisis ebbs.

The Federal Reserve chairman warned that global imbalances – the big gaps between national saving, consumption and investment rates reflected in large trade deficits and surpluses – had helped cause the crisis and needed to be corrected. (Financial Times)

Quotable – Trying to do business in China? Good luck!

“Here are five great myths and/or lies of the modern financial system:

  1. “The check is in the mail”
  2. “I’ll call you right back”
  3. “We are long-term investors”
  4. There is a secret cabal of gnome-like creatures that manipulate the gold price (up or down, depending on your druthers)
  5. “The United States believes in a strong dollar”

Macro Man

FX Trading – Does this bring out the optimist in you?

Let me just run through some timely market developments and when I’m finished I want you to tell me how you perceive the markets; though it’s rather obvious how the consensus is feeling …

I’ll start with a headline that your average stock investor is happy to see: “World stocks hit new 12-month high; dollar weak” – Reuters. That’s global investing in a nutshell these days.

And after all, why wouldn’t it be? US earnings season has not disappointed. Yeah you can argue that Apple, who reported sizeable profits beyond expectations after the bell yesterday, is going to succeed regardless of recession, depression or a Deluge of biblical proportions. But other companies are faring well, or at least better than expected.

And the kicker this week is the speculation leading up to Thursday’s report of Chinese Q3 GDP. Yesterday there was talk from a Chinese official who said that China would have no problem reaching the 8% growth threshold for the full-year 2009. That comes with 7.1% growth in the first half, expected growth of 8.9% in the third quarter plus whatever the fourth quarter brings. And why not expect China to grow north of 9% in Q4?

Another story from Reuters: “China economy growing faster every month” -Vice Premier.

Last week’s improvement in China’s dismal trade numbers is plenty justification for the mob of happy-go-lucky investors to jump all over the positive commentary and expect big things out of Thursday’s GDP numbers. This is already being baked into the cake.

Just to bring back the feel of pre-crisis growth in China, it was made public yesterday that the Chinese government would act to prohibit investment into certain industries in an effort to prevent overheating and overproduction. That’s indirectly a way of saying, “Growth is so strong again we actually have to take preventative measures from not growing too much. China is back, baby!”

But what about inflation all of a sudden?

China’s reserves jumped up to $2.27 trillion last month; capital inflows have picked up substantially. Should prices get to out-of-control then perhaps we could expect the yuan to appreciate from its current pegged level to the greenback. “A vice-governor with the People’s Bank of China said money would flow in from a rebound in the country’s trade surplus as well as from investors betting on yuan appreciation …” according to Reuters.

Which brings me back to the Financial Times story I included in the Key News section above …

Federal Reserve Chairmen Bernanke warned of potentially revisiting the imbalances that helped get us to financial crisis in the first place. This means the US better keep from adding to their deficit and China should not let its surplus grow uncontrollably.

And then there’s the potential for the Federal Reserve to begin phasing out its liquidity-adding measures and eventually move on to the course of tightening monetary policy. Some folks over at VoxEU.com seem to think this potential for the Fed to act and move rates higher will be a cause for US dollar APPRECIATION in 2010.

Assuming they’ve got their timing right on their Fed analysis, then what happens to these potential re-growing imbalances between the US and China. Will capital continue to flow into China the way they need it to in order to drive growth? Or will a stronger dollar attract capital inflows to the US?

S&P 500 futures are higher as the US session approaches; the US dollar is holding its ground after a rough day all around yesterday. We get housing numbers and PPI a bit later in the US. In Canada we’re set to get Leading Indicators plus an announcement of the latest Bank of Canada policy meeting. The market will be dissecting the rhetoric surrounding any need to intervene in Canadian dollar strength. Clear-cut language about stemming Loonie appreciation will be taken as negative; whereas more emphasis put on optimistic growth forecasts and less emphasis on Loonie-talk will likely allow the Canadian dollar to press higher.