DIRECTOR OF CURRENCY RESEARCH, GFT
IS THE North American region the last bastion of global growth? After last Friday’s strong US non-farm payrolls (NFP) and this weekend’s disappointing Chinese trade data, it certainly appears to be the case. In February, the US was able to record its third consecutive month of more than 200K new jobs and, while the labour numbers were hardly blockbuster, they do suggest that the US economy is beginning to generate a modicum of organic growth. What’s most encouraging about the US employment data was the increase in private sector payrolls, which rose by 233,000 versus 225,000 forecast. The NFP indicates that the growth in US employment is coming from private sector activity rather than government stimulus schemes and is therefore likely to lead to a sustainable recovery.
Meanwhile, in China the trade balance number released over the weekend was surprisingly weak. China’s recorded its worst trade deficit in a decade creating a gap of -$31.5bn in February as imports overwhelmed exports partly due to seasonal causes. Imports growth of 39.6 per cent on the year in February was the strongest in a year, well ahead of the 27 per cent expected and more than twice the rate of export growth. Exports grew at 18.4 per cent – barely half of what was forecast.
Experts warned about reading too much into the picture given the passage of the Chinese New Year, which likely distorted the results due to week-long factory closings. Nevertheless, the data adjusted for volatility showed the exports posted one of the weakest month on month growth rates since the mid 1990s. Furthermore, other Chinese data points including retail sales and industrial production all printed weaker this month than the market consensus as well as the results from the month prior. Overall, the data from Asia Pacific is clearly signaling a slowdown in economic activity in that region, leaving US as the sole engine of global growth.
In the FX market this new dynamic is translating into broad dollar strength. On Friday, the greenback rallied not only against the safe haven currencies such as the Japanese yen and the Swiss franc but also against risk currencies like the euro, the pound and the Aussie dollar. In fact, the Aussie has underperformed markedly over the past few days, as currency traders continued to worry about the growing evidence of slowdown in the Asia-Pacific region. The pair may be losing some of its lustre as the darling of the risk trade and now stands below the $1.0500 level and is in danger of sliding down to parity.
However, the key dollar trade this week may be in the dollar-yen cross. The pair made a strong move on Friday breaking above the ¥82.00 figure as it cleared resistance all the way from last May. The strength in the dollar is coming from the growing market consensus that the Fed will not engage in any further quantitative easing policy action as the US economy continues to recover. Today’s US retail sales report and FOMC statement could prove pivotal to any further rally in dollar-yen. Retail sales are forecast to rise by 1.1 per cent from 0.4 per cent the month prior, but given the very strong readings from the ICSC and Rebook weekly surveys of retailers chances are good that the data may surprise to the upside. If US retail sales and the FOMC statement both prove to be bullish they will provide the greenback with a further boost and could push the dollar-yen to the next level as the cross challenges the key ¥85.00 figure in the weeks ahead.