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It seems that currency markets have ruled out a Septaper

Investors sought to add risk to their portfolio’s yesterday, as comforting trade numbers out of China boosted confidence the world’s second largest economy would be able to achieve their growth target this year, and subsequently help the global recovery develop constructively. The USD was unable to cauterize its bleeding, despite continued rhetoric from various Fed members that September remains a viable option for scaling back bond purchases.

We’ve previously remarked that the price action of the USD over the past week has been curious, especially considering the incoming data points have done nothing to really dissuade the notion that tapering is still very much on the horizon. While there might still be a bit of a hangover from last week’s payroll miss, the narrowing trade deficit and yesterday’s jobless claims reinforce the American economy is gradually improving at a modest pace.

Even though the proverbial ‘training-wheels’ are still latched tightly on the American economy, the members of the Fed that have spoken this week have provide little resistance to the potential for tapering in the coming months, and with this week’s price action, it seems as though currency markets have so far ruled out a September taper announcement.

Headlines overnight were largely driven by a slew of Chinese economic data for the month of July, as investors look to assess whether or not the better than expected trade data from yesterday was merely a flash in the pan, or if the region is set for a nice rebound during the third quarter.

Retail Sales, Industrial Output and CPI and PPI were all expected to increase from the readings registered in June, while Fixed Asset Investment was to remain essentially flat. On balance, the data pretty much came in as expected, although industrial production jumped to 9.7% on a y/o/y basis in July from 8.9% in June, and stronger than the median analyst estimate at 9.0%.

Fixed asset investment remained flat as expected, but retail sales slowed to 13.2% y/o/y from June to July, dragged down from the previous reading of 13.3% as sales of automobiles and restaurant revenues both weighed on the overall household spending number.

CPI data showed that pricing pressures weren’t a worry in July, as the headline reading came in flat from the previous month at 2.7%. Inflation is tracking in-line with what China’s premier seems to find as an acceptable range, expecting to only have to move to cool growth should consumer prices threaten the 3.5% level.

While expectations are that prices will rise into the end of the year, it is unlikely at this point we while see prices challenge the top end of the government’s comfort zone, and subsequently improbable to expect any monetary policy tightening measures in China. On the topic of liquidity, new loans dropped to RMB700bn in July from RMB861 in June, however this was above the consensus of RMB640 and shows the steps the PBoC took to calm the interbank market after the June interbank liquidity crunch has in fact worked.

The Shanghai Composite finished the week adding 0.36% during its final session, while the Nikkei managed to squeeze out the smallest of gains with a 0.07% increase. The yen exhibited strength against the USD for most of the overnight session, which pushed USDJPY down into the low 96s, while the DXY pivoted close to unchanged at the 81 handle.

Over in Europe, equities are slightly higher midway through their session and looking to end the week in positive territory. The Chinese data over the last two days has helped boost risk sentiment, and it appears as if traders are happy to ride on the coattails of improved optimism for the time being. On a more regional basis, the UK’s trade deficit narrowed to £8.01bn in June and although not a drastic change in the value of exports and imports, shows that the economy is managing to stabilize somewhat. In addition, the Office for National Statistics reported that the construction sector in the UK grew in Q2 of this year, coming in at 1.4% higher than the year before. The FTSE is leading the major stock indices in Europe with a gain of 0.59% at the time of writing, while the pound remains essentially unchanged in the low 1.55s against the USD.

As we head into the North American session, employment numbers for the Canadian economy were released earlier this morning. Analysts had been expecting the Canadian economy to create 10k new jobs during the month of July, however the official numbers showed that the economy actually lost just under 40k jobs, with about an even split between full and part-time work. The participation slipped slightly to 66.5%, however the sharp erosion of jobs caused the unemployment rate to tick higher from 7.1% in June to 7.2% in July. A disproportionate loss of jobs in the public sector and among youths were the main contributors to the sharp decline, with total employment gains now just averaging 11k per month on a rolling six-month average. The numbers reinforce the notion that the Bank of Canada will be on hold in terms of the overnight lending rate, with little to glean from the jobs report that would suggest meaningful compression in the economy’s output gap.

USDCAD spiked almost 40pts after the worse than expected jobs number, as Loonie weakness helped the pair to erase all of its overnight losses. Prior to the report the positive risk appetite surrounding the Chinese data had the pair testing trend-line support, however USDCAD is now back into the mid-1.03s as the Loonie finds itself well offered ahead of the opening bell. North American equity futures are positioned so that stocks begin the day on softer ground, while the energy complex sees traders lifting offers to bring WTI north of $104/barrel. The commodity complex is actually attracting a good amount of attention, with front-month futures contracts for gas, copper, and aluminum up by 0.69%, 0.53%, and 0.56% respectively.

Wholesale inventory numbers out of the US could provide a slight knee-jerk reaction to risk appetite at 10:00am EST, however expect the sentiment towards the CAD to be very much focused on the weakness of today’s payroll report, although some of the pain could be dulled by further strength in commodities.

Further reading:  Risk appetite returns to FX markets

Scott Smith

Scott Smith

Scott Smith is a Senior Corporate Foreign Exchange Trader with Cambridge Mercantile Group and has a diverse background in the foreign exchange industry, with previous experience in both credit and trading related functions. Scott holds a Bachelor of Commerce degree from the University of Victoria, has completed all three levels of the Chartered Financial Analyst designation, and is currently working towards the Derivative Market Specialist certification offered through the Canadian Securities Institute. Cambridge Mercantile Group.