FX Daily, 04/15: Better Chinese Data Fails to Deter Pre-Weekend Profit-Taking

However, in the foreign exchange market, the Chinese data appeared to help lift the dollar-bloc currencies, and the currencies of some of China’s largest Asian trading partners, like the Korean won (+0.9% and the Taiwanese dollar (+0.25%).    More broadly, the greenback is consolidating this week’s gains against the euro, Swiss franc, and the yen.  Sterling is a little firmer (0.2%), which is essentially this week’s advance.

In an otherwise light news session, Chinese economic data are the highlight.  Although growth slipped to 6.7%, the slowest in seven years, it is the middle of this year’s 6.5%-7.0% target, and the other reports were better than expected.  This includes a 6.8% rise in March industrial output, nearly one percentage point higher than the Bloomberg median.  Retail sales rose 10.5%, also a little better than expected.  Fixed asset investment rose 10.7%  compared with a median forecast of 10.4%.

Perhaps the subdued market reaction derives not just from a jaundiced eye cast upon the veracity of Chinese economic reports, but also by the sense the figures, even if accurate are not sustainable.  For example, despite the glut, Chinese steel output rose to a new record high in March.   In addition, the price of the better economic activity was a surge in debt.  New yuan loans jumped CNY1.37 trillion, nearly a quarter more than expected and well above six and 12-month averages.    The broader measure that covers overall lending (including by the shadow banking sector) soared CNY2.34 trillion, nearly 70% more than the median forecast.

There were two economic reports in Europe to note.  First, consistent with the Bank of England’s recognition that the UK economy has lost some momentum in Q1, February construction spending unexpectedly fell 0.3%.  The median guesstimate was for a flat report.  Adding insult to injury the decline in the January series was double to 0.4% from -0.2% initially reported.  There was little market reaction.

The eurozone reported a smaller than expected February trade surplus of 20.2 bln euros.  This was about 1.3 bln euros smaller than expected but was offset by a 1.6 bln upward revision to the January surplus, lifting it to 22.8 bln euros.   Here too the market reaction was minimal.

The dollar initially rose to almost JPY109.75 in Asia but was subsequently sold to new session lows in the European morning near JPY109.  Nevertheless, the greenback is holding on to about a 1% gain this week, the first in three weeks.  The yen’s modest pullback this week was sufficient to prompt the BOJ’s Kuroda to suggest that the recent excessive yen strength has been “somewhat corrected.”

Contrary to the currency war meme, we have argued the bar to Japanese intervention was higher than met by current conditions.  Despite elevated rhetoric by some Japanese officials, we see in Kuroda’s comments support for our contention that intervention, even after the G20 meetings around the IMF/World Bank meetings, remains unlikely.    

Japan was struck by the most powerful earthquake since 2011.   All of the industrial sectors in the Topix fell except telecoms, which eked out a small gain.  Typically, one would look for construction companies to outperform and insurance companies to underperform in response.   The Topix rose 5.7% this week, which is the second best weekly performance this year after a nearly 8% gain in the middle of February (which followed a 12.6% decline in the previous week).  

The North American session features the April Empire State manufacturing survey.  The March reading was the among the first data points to suggest the manufacturing sector was improving after a nearly year-long slump.  More improvement is expected.  The government’s March industrial production and manufacturing output will also be reported.  The University of Michigan’s consumer sentiment measure, and perhaps more importantly, its survey of inflation expectations will also be reported.  The February TIC data will be reported after the markets close.