China’s latest - and weaker than expected - GDP growth figures issued on Thursday had an immediate effect on currency markets, helping reverse earlier gains in the Australian dollar and adding to renewed weakness in the New Zealand dollar. As Bloomberg reports:The Australian and New Zealand dollars fell after China said its economy expanded at the slowest pace in almost 10 years, raising concern the global recession may deepen. The Australian currency erased earlier gains versus the greenback and the yen as U.S. stock futures fell after a Chinese government report showed economic growth slowed to 6.1 percent last quarter from 6.8 percent in the prior three months. New Zealand’s dollar extended declines as a report showed manufacturing shrank for an 11th month.
But in the view of some currency strategists, the Aussie looks fairly good right now, following last week’s 25bp interest rate-cut by the Reserve Bank of Australia to 3 per cent. Ashraf Laidi, chief market strategist for CMC Markets, notes that yen-dollar cross trades are continuing a gradual recovery. While the dollar gained against the yen and euro on data showing US consumer prices fell in March by a larger-than-expected monthly 0.1 per cent, Laidi predicts that for now, the dollar-yen rate is likely to face pressure at Y99.70, while drifting around its 200-day MA of 99.00.
The duration of carry trades, meanwhile, remain “selective,” he adds, with the more prolonged gains (and short-lived losses) seen in the Aussie dollar due to the limited scope of rate cuts by the Australian central bank (last week’s cut being a modest 25bp) relative to G10 central banks (quantitative easing included).
Meanwhile, Aussie rates are near at a hefty 3.00%. Aussie’s latest 6-month high of 0.7320 drew near to the 200-day MA of 0.7350. The long term benchmark has not been breached since August. The Aussie story is now well cemented into the psyche of the institutional and retail investors. Aussie strength is especially underscored via its limited pullbacks during risk aversion.
Coming back to China, which has received a boost after what has been widely intepreted as the White House’s tactical retreat from its earlier “currency manipulation” allegations.
In a statement on Wednesday, Treasury secretary Tim Geithner said the US still believed China’s Renminbi was undervalued, but cited four reasons for the decision not to name China as a currency manipulator in the report:
China, Mr Geithner said, had “taken steps to enhance exchange rate flexibility”. It allowed its currency to appreciate slightly against the dollar as the crisis intensified and other emerging market currencies fell. It accumulated fewer reserves in the fourth quarter of 2008 and had “enacted a large fiscal stimulus” to help rebalance demand.
Interestingly, reaction in Congress - which had previously worked itself up about the issue - was muted. The Financial Services Forum, a lobby group, said the decision not to cite China in the report was “the prudent call”.
As Brad Setser notes in his Follow the Money blog, “this isn’t the right time to force resolution of this issue”:
China’s exports to world and US imports from China are both falling. Chinese reserve growth — read the amount of dollars China has to buy to keep its currency from appreciating — has fallen sharply. And perhaps most importantly, the RMB was one of the few emerging market currencies that appreciated during the crisis in real terms.
But make no mistake, warns Setser: China’s currency still looks undervalued. It is only a bit higher — according to the BIS index– than it was in 2001 or 2002, back when China was exporting a fraction of what it does now. In other words, the rise in the productivity of China’s economy hasn’t been mirrored by rise in the external purchasing power of its currency. That is a big reason why China’s current account surplus remains large.
And, as Setser points out, the underlying issue remains:The biggest driver of moves in China’s real exchange rate remains moves in the dollar. History suggests that China cannot count on dollar appreciation to bring about the real appreciation it and the global economy need if China’s surplus — and thus China’s accumulation of money-losing foreign assets — is going to come down. It will be hard — in my view — to have a stable international monetary system if the currencies of all the major economies but one float against each other. And China is now a major economy by any measure.
But, as the Telegraph’s Ambrose Evans-Pritchard - and FT Alphaville - note on Thursday, perhaps we should all be looking at China’s very active moves in the copper market right now, and the possibility of a new copper standard emerging from Beijing.
Related links:
China GDP growth slows to record low - Reuters
Australia, NZ dollars weaken after China’s GDP growth slows - Bloomberg
The US doesn’t name China a currency manipulator - Brad Setser, Follow the Money
White House retreats from China currency manipulation allegations - FT
Forget Treasuries - is copper the future for China? - FT Alphaville
