Thursday, June 10, 2010

Asia Leads The Way!

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By Mike Conlon | June 10, 2010

Overnight, China reported a 48.5% increase in exports showing signs that its economy is still cooking with gas.  However, this figure could be a “one-off” as China’s largest trading partner, the EU, is enacting austerity measures to deal with its debt crisis.

An additional sign that Pac-Rim growth may be intact is the interest rate hike that occurred in New Zealand overnight.  The RBNZ raised rates 25bp to 2.75% as most economists had expected.  I, however, was not in this camp as I thought that a potential Chinese slowdown and the EU debt crisis might give reason for pause.  I was mistaken.

Also from that region, Australia reported better than expected employment data and as a result the commodity currencies on renewed risk taking, and Japan reported better than expected GDP growth.

In the UK, the BOE kept interest rates steady and their bond-purchase program in place.  In the EU, there is pressure on the ECB to provide clarity over its own bond-purchase program.

So we’re seeing some major risk taking today, with the Japanese yen lower against all but USD, as economic recovery in Asia is pushing yen higher vs. the other safe-haven currency.

In the forex market:

Aussie (AUD):  The Aussie is higher as renewed economic confidence due to better than expected employment figures and Chinese exports have ramped up risk appetite.  The employment change came in at a gain of 26.9K jobs vs. an expectation of 20K.

Loonie (CAD):  The Loonie is mixed this morning, taking a back seat to Aussie and Kiwi as the focus this morning has been on Pac-Rim economic growth.   Oil is higher to $75, so there is a bid higher vs. Euro, Dollar, and Yen.

Kiwi (NZD):  The Kiwi is the big winner this morning as yesterday the RBNZ raised interest rates from a record low 2.5% to 2.75%, the first hike in nearly 3 years.  Inflation must be heating up in New Zealand, as this decision occurred in the face of the Euro debt crisis.  A return to “normalized” rates is desired by the RBNZ, so this decision has encouraged carry-trades and risk-taking in the market.

Euro (EUR):  The Euro is mixed this morning as well, trading lower against the commodity currencies but higher against the rest.  The Euro is getting a boost from the good economic news from the Pac-Rim, and a debt offering from Spain that was over-subscribed.  The latter may be a sign that the Euro zone countries may be able to attract capital despite their problems, though higher rates also entice investors.

Pound (GBP):  The Pound is falling right in line on my “risk ladder”, trading lower against the currencies above it on this list, and higher against the ones below it.  This comes despite the fact that the BOE has kept the interest rate steady at .5% and its stimulative bond purchase plan the same.  All of this comes as the UK prepares for budget cuts in an effort to get its deficit under control.

Dollar (USD):   The Dollar is the biggest loser this morning as the focus has shifted toward Pac-Rim growth this morning, pushing world equity indices higher.   The market is acting favorably to growth prospects around the globe as well as budget-cutting measures taking place.  Perhaps the powers that be should take a note that they should be cutting deficits and not creating even larger ones.  As world economic stabilization takes place, expect US policy to be questioned.

Yen (JPY):  Overnight, Japan reported better than expected GDP growth at 5% vs. and expectation of 4.2%.  In addition to the export-led recovery, consumer spending increased to a .4% gain, compared to a .3% gain last quarter.  This is leading to the belief that corporate spending will pick up which should be better for employment going forward.

So today was the “big” news day and it did not disappoint.  Nearly all economic data reported came in as expected or better, showing signs that global growth is occurring, despite the problems in the Euro zone.

This begs the question: What is the US thinking?  Nearly all other economies are slashing spending or raising rates (or both), and the US appears to be doing just the opposite.  Weak-willed politicians and misguided economic policies while having worked in the short-term, need to be reversed before it is too late.

While we are certainly not out of the woods yet, there are encouraging signs coming from around the globe.  Hopefully, with some practical and forward-thinking economic regulation to prevent over-leverage and excessive speculation in the markets, the world economy can recover.

Regulation is not the anathema of the free-market; excessive and misguided over-regulation is.

Let’s just hope that they get it right for once, and allow natural economic cycles to take place.

In the meantime, hang on for the ride!

To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!

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