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Key News

  • Several Asian central banks intervened on Monday in an effort to temper the rally in their currencies as the dollar weakened broadly, highlighting fears that rapid currency rises may hurt economic recovery.
    Central banks in South Korea, Indonesia, India and Singapore were spotted buying U.S. dollars to contain their currencies, driven up by the dollar’s weakness and expectations that China’s strong exports data may prod Beijing to allow the yuan to rise. (Reuters)
  • China banks eclipse US rivals (Financial Times)
  • Banks Warned on False Sense of Securities (Wall Street Journal)
  • End to Dollar Carry Trade Isn’t Here Yet (Wall Street Journal)


“People only see what they are prepared to see.”

                             Ralph Waldo Emerson

FX Trading – Face It: Everything Looks Hunky Dory
Big news for risk appetite this morning …

China has reaffirmed common belief that it will continue to press on and realize a legitimate and sufficient recovery. They will retain their position as a global economic leader and in doing so will help out many smaller economies at the same time.

The news: China’s exports grew by 17.7% in December, and imports screamed higher by 55.9%. In each case the actual number trounced what analysts had been expecting.

I wanted to pull a couple pieces straight from the Reuters article on China’s trade numbers … to show the ideas that, I think, are shaping market expectations:

1) Its imports of crude oil also hit a monthly record, while iron ore shipments were the second highest ever and copper imports beat expectations.
2) Booming Chinese demand will be a boon for commodity exporters …
3) Huang Guohua, a statistics official with the General Administration of Customs, called the rebound in December exports "an important turning point". He cited strength in export orders evident in last month’s survey of purchasing managers as evidence that exports are set to grow further.

As was the case before the credit crunch when commodity prices tanked, China is still thought to be the reason demand will grow and prices will subsequently rise. I can just see the commodity bulls now, salivating over the monthly record of oil imports into China. (Not to mention, I think I came across a headline earlier this morning about how China is selling more cars than the US now … or something to that effect.)

As a few loyal readers of Currency Currents reminded me last week after I further questioned the predictive power of economic fundamentals for financial markets:

Markets lead fundamentals. It is expectations that matter.

To be sure, I attended an afternoon discussion hosted by CB3 Financial Group yesterday in my hometown of Stuart, FL. It was an excellent and thorough analysis on the state of the economy and markets.

The big idea I took from it: don’t let the economy dictate your participation in the markets. More specifically, the market is the leader; the economy is the follower. A nasty unemployment line (among other things) can be a distraction that keeps you from getting back into a market that’s already recovered.

So here we stand – the dollar is getting pasted this morning. European currencies are leading; commodity dollars are lagging. But nevertheless, it’s an across-the-board move against the buck.

It might not be an entirely risk-back-on play thanks on this China trade news, as this morning’s action might simply be an encore to the dollar’s dive after Friday’s Nonfarm Payrolls report came in worse than expected.

There was a lot discounted in the price of the dollar before Friday’s news, accounting for its recent strength; that being better jobs figures and a greater chance the stars would align to prompt a rate hike by the Fed “sooner, rather than later.”

The take:

Yes, China bulls are feeling good lately. And while we understand the dynamics that drive markets and the role fundamentals play on underlying prices, we continue to build multiple scenarios … so we’re not surprised if the economy takes a turn the market didn’t expect … or hasn’t yet expected.

There are still risks in China. There are still risks to the US recovery. There are certainly risks in the Eurozone economies. And ultimately, there are still big risks for financial markets. Just keep that in mind.