China Worried About U.S. Inflation

Good day… And a Marvelous Monday to you. It’s hard to believe that Monday morning is already upon us. Where does the time go? Just as the currency market took a breather, our cold weather from last week decided to follow suit, as it turned out to be a nice late winter weekend. Friday was fairly uneventful as the currencies traded in a tight range throughout the course of the day; so it will be interesting to see how this week shapes up. Let’s see if the currencies can build from last week.

Volatility was basically non-existent during Friday trading with less than a 0.50% difference between the high and the low of the dollar index. The overall bias, however, was for a weaker dollar, as the euro (EUR) held onto 1.29 for a majority of the day and was near 1.2920 as I left the desk. The pound (GBP) and Swiss franc (CHF) were the only two currencies left on the bench last week with losses of about 1% and 2.5% against the dollar respectively. The rest were able to turn in a decent week with the Swedish krona (SEK) on top of the pile posting a 6.5% gain.

The SEK got beat up last month on concerns regarding its lending exposure to the Baltic States. But traders have come in not only on thoughts of it being oversold, but also as risk aversion has eased a bit. We saw Swedish inflation fall to a 3-year low of 0.9% as rising unemployment and slower demand are keeping prices contained. Their central bank, the Riksbank, will meet on Friday and most are looking for a 0.25% cut to 0.75%, so we’ll see if there are any surprises. The bottom line, not only with this currency but all of the other small European currencies, is that the euro needs to appreciate in order to provide any type of sustained traction.

I saw a report where Citigroup’s technical analysis team said that if the euro trades above 1.2992, we could see sharp appreciation and a break out of this range bound trading pattern we have seen for a while now. They didn’t provide any estimates as to how much, but we did see the euro snap out of its 4-week decline last week. It’s nice to see that we aren’t the only ones out there taking notice that a turn in the currency market could be inching closer.

As I came in this morning, we had a sizable sell-off in the dollar during overnight trading with the euro shooting up to 1.3040. It looks as though investors in Asia were feeling better after the results of the G-20 meeting. The Asian stock markets were up on the day as the G-20 finance ministers vowed to combat the global recession by working together to clean up the toxic assets and OPEC refraining from cutting output. We blew right past that 1.2992 figure here this morning so we should get a better idea of its staying power as the day progresses.

China threw a cat among the pigeons as they voiced concerns about their holdings of U.S. Treasuries, wanting assurances that their investments are safe. Premier Jiaboa said, “We have lent a huge amount of money to the US and I request the US to maintain its good credit, to honor its promises, and to guarantee the safety of China’s assets.” A Chinese analyst commented that they were worried that the United States may solve its problems by printing money (which would stoke inflation), but that if the U.S. can make sure this won’t happen, then China should continue to invest.

President Obama quickly responded to ease those concerns by saying in a press conference, “Not just the Chinese government, but every investor can have absolute confidence in the soundness of investments in the US.” Continued Chinese investment in Treasuries is crucial in financing the stimulus packages. I wouldn’t think any type of a major sell off is likely, but I could see them backing off a bit if they don’t feel comfortable. It will be interesting to see if anything changes going forward, but I don’t blame them for wanting some type of re-assurance.

With not much to report on from Friday, we can look at what is due out here in the United States this week. This morning we have Empire manufacturing, TIC flows data from January, and February industrial production, along with capacity utilization. The TIC figures are going to be a big one, which are supposed to show an increase, and will tell us for sure if foreigners were still buying up U.S. financial assets. The rest of the data out today is expected to disappoint.

Tuesday brings us supply-side inflation with the producer price index and Wednesday will give us CPI along with the fourth quarter current account balance. The Fed meets on Wednesday as well, and they are expected to keep rates unchanged… But any comments or statements that result could be market movers. We round out the week with jobs numbers and leading indicators, both of which are expected to be worse than previous figures.

All in all, the data out this week points toward a continuation of the recessionary pressures and not much in the way of good news. Lawrence Summers cautioned that monthly job losses of 600K+ are unlikely to end soon and job cuts are probably not going to stop imminently. Consumer spending is the backbone of our economy, so as job losses continue to mount, its difficult to see any type of sustained improvement.

I’ll finish up with gold today as it continues to quickly bounce off of the minor sell-offs we have seen. The actions taken by the Swiss National Bank last week have tarnished its view as a safe haven investment in some eyes, so gold would seem to be one of the few assets left classified as such. UBS said a couple of weeks ago they see gold trading as high as $1,100 within the next three months, which doesn’t seem too far fetched especially as support levels continue ratcheting upward. We’ve seen a small pullback so far with the risk takers out in the markets this morning, but its still holding onto $920 as I write. Until tomorrow…

Currencies today 3/16/09: A$ .66.19, kiwi .5309, C$ .7900, euro 1.3027, sterling 1.4221, Swiss .8452, rand 9.9158, krone 6.7672, SEK 8.4452, forint 227.89, zloty 3.4308, koruna 20.4326, yen 98.26, sing 1.5329, HKD 7.7528, INR 51.3350, China 6.8382, pesos 14.5153, BRL 2.3051, dollar index 86.667, Oil $44.24, Silver $13.0750, and Gold… 924.52

That’s it for today… Hopefully everyone was able to enjoy their weekend, I know I did. We have March Madness to look forward to, so get your brackets filled out and best of luck to you. It was a good weekend for our Missouri Tigers as they won the Big 12 championship for the first time and pulled a number 3 seed in the tournament. Anyway, we have a busy week ahead of us so I had better get to work. Have a Marvelous Monday!