Ralph Shell @ 2:24 PM, Wednesday July 14 2010
The earnings reports, going against last years weak numbers, continue to help equities and are cited as a reason for the strong euro and to a lesser extend, the pound. Both of those markets had been loaded with spec shorts, vulnerable to a short covering rally.
The pound was helped by the better than expected claimant count report, and the unemployment rate which dropped more than expected to 7.8%, down from the previous period's 8.0% Further evidence that the recovery is happening in Britain, combined with the inflation rate above that deemed prudent by Bank of England Governor King, has increased conversation about a bank rate increase.
The flip side of the pound euro strength is the possibility of a weaker USD. This morning's US retail sales report, - 0.5%, less than the expected -0.2% suggests the US recovery is slowing. It is difficult to determine how much the waning support for the existing administration is influencing the American consumer. A recent poll by CBS, long a supporter of the Obama administration, revealed that only 13% believed the President's policies had helped them. With employment possibilities limited, this combines to make the consumer very cautious.
Tonight we get a multitude of Chinese economic reports which may provides clues about the Chinese economy. The quarterly GDP is forecast up 10.5%, a little less than the 11.9 in the previous period. The CPI is anticipated to be up 3.3%, higher than last period 3.1%, and the PPI up 6.8% versus 7.1% in the prior period. Retail sales is forecast up an amazing 18.8%, and the fixed asset investments up 25.2%.
Fixed asset investment has become a problem for the Central government, as the local governments have been going over the budget on many of these projects. According to an article in the Asia Times by Olivia Chung, an audit of local governments reveals they have exceed their budget by over $412B.
On another note, China seems well aware that the US and Europe will be unable to continue importing at the same pace. Increased domestic consumption, and investments in natural resources are becoming more important to the Chinese planners.
The impact on currencies, because of the rate of Chinese growth is important but the specific correlation is illusive because of the dollar yuan peg. Japan as, China's largest trading partner, will certainly be impacted by the rate of economic activity, but trading the yen hardly seems to be an appropriate proxy for the yuan. The Aussie would certainly benefit from good Chinese numbers, but the recent plunge in the dry cargo freight rates is a caution flag. Lower iron ore and scrap demand might hurt the Australian commodities.
Perhaps the NZD is a place to look for a trade. With the open interest in the futures market going up over 20% yesterday, some one thinks so. The market today made it to .7250, but has since relaxed, trading down to .72. Try to buy the kiwi on a little pull back to the .7170 level, risking 100 pips. The initial target is .7320, but if the open interest keeps growing, showing an inflow of new money, the target could be raised.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.