Good morning and welcome to today’s foreign exchange market commentary on Thursday, the 14th of March.
China is the least likely candidate to receive sympathy in its complaints about other countries engaging in the so-called currency war. Beijing’s long-standing dollar-peg ensured it stacked up the world’s largest reserve of foreign currencies and rack up double-digit export growth for decades.
To be sure, February’s 22 percent jump in exports suggests Chinese manufacturers are still winning the small trade skirmishes globally. This should make combative comments about currency wars by Chinese officials appear needless, if not unusual. However, recent remarks by Chinese officials on competitive currency devaluation and money-printing by central banks indicate deep Chinese concern. The head of China’s sovereign wealth fund went to the extent of warning Japan against treating their neighbours as garbage bins and starting a currency war.
A closer look at Chinese economy explains the recent outburst against monetary debasement. Inflation is rising while retail sales growth and industrial output has cooled. More alarmingly, investment activity is picking up in the property and real-estate sector. Investment is fixed assets surged 21.1 percent while real-estate investment rose at an even faster clip of 22.8 percent. Property sales have soared 77.6 percent in value-terms in the first two months of 2013 over last year. The massive lending numbers seen in the beginning of the year seems to generate more inflation than growth. In short, Beijing may witness a stagflation soon.
Clearly, the last thing it needs is a surge in capital inflows due to quantitative easing. China had protested against Federal Reserve Chairman Ben Bernanke’s QE measures earlier. With $3 trillion in foreign reserves, much of which is held in US dollars, China’s stake in monetary debasement is high. There was an unintended benefit though. As the dollar slipped, so did the yuan, giving exports a boost.
This time it is different since its Japan who’s switching on the presses. Losing competitiveness to Japan should not be a worry since both the countries rarely compete directly. However, if Japan’s pursuit for inflation pushes up Chinese prices, there’s bound to be tensions.
The yen’s 18 percent decline against the dollar since middle of November is likely to trigger flows into a hard currency. The yuan, with its managed float against the greenback, stands out in Asia as an attractive option. Though China officially has closed capital account, keeping its borders sealed to hot money flow is a big challenge, as latest figures suggest. China’s central bank reported in early March that companies traded $109 billion worth foreign currency in January, a record for a single month. With leaky capital control and a fixed exchange rate, Beijing may lose command over its own monetary policy.
For China, the real worry is property bubbles and rising inflation rather than loss of export competitiveness. Then there is another policy dilemma. If the central bank raises interest rates to reign in inflation, more capital may flow in due to interest rate differentials. But if Japan and the UK continue with QE, China will find it harder to keep speculative capital out. Sealing the capital account could be an option, but that would delay the efforts to internationalize the yuan.
Beijing may be forced to float its currency sooner than it would have wanted.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.1522
GBP/US$ – 1.4932
GBP/CHF – 1.4254
GBP/CAN$ – 1.5338
GBP/AUS$ – 1.4412
GBP/ZAR – 13.7932
GBP/JPY – 143.72
GBP/HKD – 11.5821
GBP/NZD – 1.8241
GBP/SEK – 9.5934
EUR: The euro struggled yesterday, slipping across the board after European Industrial Production data, released in the morning, showed factory output in the area fell 0.4 percent in January, worse than the 0.1 percent expected. After ending the session on Tuesday at 1.3027, the single-currency skidded to $1.2954, a three-month low against the dollar. The weaker than expected French payrolls data that showed a 0.3 percent decline quarter-on-quarter also weighed on the euro and the eventual low came after the strong US retail sales reading, and the EUR/USD pair has struggled to recover since. Today is first day of the EU economic summit in Brussels and expect discussions to revolve around on a potential financial bailout for Cyprus. The EUR/USD pair opens at 1.2960 this morning.
USD: The US dollar firmed up against major currencies on Wednesday after February retail sales beat expectations yesterday, advancing 1.1 percent versus forecasts for a 0.5 percent rise. It was the strongest print in five months and the US dollar strengthened to a three-month high against the euro, ending the day below 1.30 in London. Sterling however, held its ground reasonably well and traded within a 50 pips range. Today sees the release of more jobs data from the other side of Atlantic and positive reading is expected to boost the greenback further as the world’s largest economy continues on the road to recovery. A strong monthly producer price gauge is also expected to support the dollar when it is released this morning. There is no data due out from the UK today and GBP/USD is expected to consolidate above the 1.4900 level.
Have a great day!
