Market Reports and Trade Recommendations by FXPRIMUS

Dear Traders,

We at FXPRIMUS wants to provide a Safest place to trade for our client. In doing so, we always provide our clients with the best market reports and trade recommendations.

Our Senior Economist, Jimmy Zhu helps our clients understands the current market trend and keep them up to date with the latest market reports and analysis.

Why do we share our market reports and analysis? Simple, we hope to help traders with their decision making and hopefully it helps all traders to be more profitable.

Our market reports covers all the important forex related news. This is to ensure that fellow traders will be up to date with the current market news.

Market Brief of the Week for 28 April 2014: Investors Favor the Safe Haven Again

Economic Insights

Riskier assets might take a break for a while, when Russia-Ukraine geopolitical risk elevated

USD ended last week mostly in narrow ranges, despite equities selling off on the tech companies’ valuation and the Russia-Ukraine concern. USDJPY forms a clear downtrend last week, as JPY was favored by the investors when the geopolitical crisis affected global haven flight, pulling USD to yield lower.

G7 has prepared sanctions on Russia that could be imposed as soon as Monday as U.S., U.K. called on Moscow to help release observers seized by rebels in eastern Ukraine. Asian Stocks Drop on Earnings because of the Ukraine tensions. The U.S. and European Union will impose new sanctions on Russia as soon as today during the detention of international observers by pro-Russian separatists.

Possible actions could affect Russian companies and individuals close to President Vladimir Putin over the escalating crisis in Ukraine. They will be looking to designate people who are in his inner circle, who have a significant impact on the Russian economy, according to White House. They will also be looking at taking measures as well with regard to the high-technology exports to their defense industry. All of this together is going to cause an impact.

The Yen held weekly gains against most of its 16 major peers as tension in Ukraine spurred investor demands for safety. The intensifying situation in Ukraine had propelled stock selling and Yen buying. Japanese markets will close down tomorrow and on the 5th-6th May for The Golden Week public holidays.

The Fed meets on 29th-30th April, when economists are predicting that the central bank will cut monthly asset purchases by another $10 billion, down to $45 billion. Policy makers will continue to taper at that pace until ending the program at the 28th-29th Oct.

30th April: Euro-area Consumer Price Index (CPI) will be released. Euro-area CPI is likely to remain below 1% for the seventh month in April. Fifteen of the eighteen countries of the Euro area were reported to have headline measures of inflation of less than 1% in March. Five nations had experienced complete deflation. The European Central Bank (ECB) forecasts the average price growth to remain below 2% through 2016. A weak inflation reading on the 30th April will probably see the president of ECB facing calls to act as soon as next week by imposing negative interest rates for the first time or pushing forward with the plans for quantitative easing.

Daily Market Report for 29 April 2014: Federal Open Market Committee (FOMC) Meeting Decision Could Hurt Gold Price This Week

Economic Insights

Federal Reserve (Fed) and Bank of Japan’s decisions this week is unlikely to surprise the market

Tensions between Russia and Ukraine are escalating once more. Last week, Russian President Vladimir Putin had warned Ukraine against continuing the anti-separatist offensive that killed five rebels. This week, representatives of the 28 European Union nations will meet to impose new sanctions on Russian companies and individuals close to the Russian President Vladimir Putin.

In the face of escalating tensions, two assets have been rising – the Japanese Yen and gold. A clue can be seen from the US Commodity Futures Trading Commission (CFTC). Last week, futures traders decreased their bets that Yen will decline against the greenback. The differences in the numbers of wagers by hedge funds and other large speculators on a decline in Yen compared with those on a gain – so-called net shorts – was down to 67,243 compared with net shorts of 68,716 a week earlier. This tells us that more money managers are betting on Yen to rise.

The trend was similar in gold.

The net-long position in gold rose up 0.5% to 90,572 futures and options, the first increase since 18th March. The increase snapped a four-week retreat that was the longest in 2014. Gold has experienced wild swings since the Russia-Crimea saga started. When Russia annexed Crimea last month, gold climbed to a six-month high, touching a price of USD1391.97 an ounce on 17th March. However, it fell almost 9% thereafter on signs that peace would return.

The “red herring” that could deter continued gains in gold and Yen would be the policy meetings by the Fed and the Bank of Japan (BoJ) this week. Here’s why.

Federal Reserve (Fed)

The Fed meets is on the 29th and 30th April this week. There’s a high chance that the central bank will cut the monthly asset purchases by another USD10 billion down to USD45 billion. The policymakers are expected to continue tapering at that pace until ending the program at its meeting on the 28th-29th October. If the Fed does taper this week, the US dollar would receive an uplift. The knee-jerk reaction would then cause gold to fall because gold and the US dollar tend to move in the opposite directions.

Bank of Japan (BOJ)

Yen demands may be limited this week as traders sit on the side-lines and await the decisions from the central bank’s policy meeting. This will be Japan’s first monetary policy meeting since the consumption tax hike in April. BOJ has delivered unprecedented stimulus to the economy in the last two years, pledging to double base money via aggressive asset purchases to accelerate consumer inflation to 2 %.

I expect BOJ to keep its monetary policy steady this week and only step up the stimulus in the second half of the year to offset the negative drag on the economy from the tax increase. However, there is a slight possibility for BOJ to announce additional stimulus this week if figures are not up to their expectations.

I have learnt over the years that it is better to stand prepared and react to any surprise announcements from the central bankers, rather than jump the gun and pay for it with my trading account.

Daily Market Report for 30 April 2014: Bank Of Japan (BOJ) Is Expected To Maintain Its Policy

Economic Insights

Bank of Japan (BOJ) is unlikely to add on any stimulus in today’s meeting

Japan’s central bank is probably not yet ready to expand its current easing size, when the Bank of Japan rolled out its strategy for quantitative easing this time last year. The most visible tactic was the purchases of 60–70 trillion Yen in assets within a year, aiming to double the size of Japan’s monetary base, and hit a 2% target for core inflation on a two-year time horizon.

The strategy has had some notable successes. Core CPI rose up to 1.3% year on year in March, a pronounced turnaround from the negative 0.4% inflation when the stimulus was launched. Inflation expectations have risen. That has helped change the behaviour, with business investment shifting from a contraction to an expansion. Most recently there are also concerns that progress has stalled. All of the gains in the Consumer Price Index (CPI) had occurred in 2013. The index has been flat for the last four months. A stronger Yen and a weaker Nikkei since the start of 2014 show market euphoria has faded. It is one of the reasons that voice for more easing increases especially since the sales tax hiked.

Tighter fiscal policy, following an increase in the consumption tax in April, threatens to dent growth. The BOJ has scope to do more. A look at the central bank’s balance sheet shows total assets that equals to about 22% of outstanding government debt. That’s less than the 27% of the U.K. gilt market owned by the Bank of England (BoE) and roughly in line with the 20% of U.S. Treasury debt held by the Federal Reserve (Fed). But Abe’s reform has not been deployed, so for in a meaningful pace, we still expect the BOJ to stay put.

However, Governor Haruhiko Kuroda said he won’t hesitate to adjust the policy if needed. An early move would have the advantage of taking the market by surprise. With the Fed taper edging up rates in the U.S., a relatively small addition to BOJ purchases could also have a huge impact. A wider difference between the rising of U.S. and the suppressed Japanese rates might stoke another period of Yen weakness, heating up corporate profits.

Still, with Kuroda apparently is confident in the current policy stance, an early move to ease seems to be an outside chance for this meeting. Policy makers probably want more time to assess the impact of the April tax increase before considering any further action.

If policy stays on hold, the focus of attention will shift to the BOJ’s Outlook Report for clues on shifts in policy makers’ thinking. Downgrades to forecasts for growth and inflation — currently at 1.4% for Gross Domestic Product (GDP) and 1.3% for core CPI in fiscal year 2014 — may pave the way for further easing in the third quarter.

Euro Zone CPI released later may show another negative result, as the confidence waned. Europe’s economic confidence gauge unexpectedly dipped this month from the three-year high touched in March.

The European Commission’s economic confidence index fell to 102 points in April, down from a revised 102.5 in March and below the earlier consensus reading at 102.9 reading.

Mario Draghi insisted the central bank stood ready to act if inflation conditions in the euro zone deteriorated two weeks ago. The European Central Bank (ECB)’s governing council is unanimously behind the idea of scooping up assets via quantitative easing if inflation does not pick up. If market rates were to soar, the ECB would be ready to take other unconventional measure or same thing goes for Euro. These include cutting the rate that the ECB charges banks for parking their money in its deposit facility below zero, or extending a new round of cheap loans to lenders.

But because the governing council meets is in two weeks’ time, it won’t be an easy task. More likely, the ECB will wait until it publishes its next set of inflation forecasts, which are due in June.

Daily Market Report for 2 May 2014: Loan Data and Inflation In the Euro Zone Still Call For Quantitative Easing (QE)

Economic Insights

Lending data in the Euro Zone showed a healthy improvement, but further easing is still needed

Euro dollar edged higher in the past few days as inflation and lending had picked up. The European Central Bank (ECB)’s quarterly bank lending survey was released two days ago. It will allow the hawks on the Governing Council to argue that an increase in credit to the real economy is on the horizon. The doves may argue that the survey is no longer a good indicator of credit extension. The proponents of further easing are likely to win the battle eventually, as long as inflation remains in a downtrend.

Net demand was positive for all loan categories for the first time since July 2006. The difference between the percentage of banks reporting an increase and that reporting a decline in demand stood at 2% for enterprises. The figure for loans to households for house purchases measured at 13% and that for consumer credit and other lending to households at 4%. The strength in net demand for loans for house purchases relative to the two other categories is in line with historical patterns of credit extension.

The figure on net demand for loans to enterprises recovered throughout the course of last year and yet actual loans to non-financial corporations hit new record lows in the same period. The time series from the bank lending survey appears to have previously been a leading indicator of loan growth. The story is largely the same for loans to households. Both of the time series from the quarterly bank lending survey have been recovering since 2012, while credit extension remains subdued. The survey on the access to finance of small and medium-sized enterprises in the euro area, also released yesterday by the ECB, indicated funding to those businesses is still limited. The figure on the availability of bank loans remained in negative territory at minus 4%, though that was an improvement from minus 11% in the previous reporting period.

In the U.S., Nonfarm payroll will be released tonight. Growing economic inequality amid a labour crisis requires an efficient policy response to reduce lasting risks to a new generation of workers. The long-term effects of the shock to the U.S. labour market from the Great Recession and the subsequent deterioration in the labour force have inflicted a case of hysteresis, or a permanent break, in the generational development of the U.S. labour force. The unemployment rate among those aged 16 to 24 is 14.5% compared to 6.7% in the general population.

Both figures probably underestimate the condition of the labour market because of the exit from the workforce of millions of discouraged workers and young people who have been shut out of opportunities thanks to a growing experience gap. Hysteresis demands that U.S. labour market policy shift from a passive stance, which relies primarily on unemployment compensation, to an active strategy that targets blue-collar workers and young Americans between the ages of 16 and 24 who, more than any other group, have been shut out of the recovery.

In China, its official Purchasing Managers’ Index (PMI) edged up to 50.4 in April from 50.3 in March, hovering above the 50 mark that separates improving from deteriorating conditions. Strengthening new orders provided another tentative sign of stabilisation in the manufacturing sector, arguing against a further shift in policy toward stimulus.

Market Brief of the Week for 5 May 2014: Strong Payrolls since 2012 Is Not Sufficient To Alarm the Fed to Discuss the Rate Hike

Economic Insights

Dollar almost outperformed all the G10 currencies despite the concern of the U.S. labour market

U.S. employers boosted payrolls by the most in two years and the jobless rate plunged to the lowest since the financial crisis in 2008. The 288,000 gain in employment marked the biggest upside surprise since February 2012 and followed a 203,000 increase in the prior month. Unemployment dropped to 6.3%, the lowest level since September 2008. This is lower than the Federal Reserve (Fed)’s previous key threshold at 6.5%, which has been removed since March this year.

U.S. Nonfarm payroll & U.S. unemployment rate

http://www.fxprimus.com/education/wp-content/uploads/2014/05/05052014.png

Source: Bloomberg

The winter “noise” still has some effect here, as the economy is gathering momentum after the bad winter. Surprisingly, stocks fell this time. Concern about early tightening fears and escalating tension in Ukraine had overshadowed the jobs report. Safe haven is in favour again, yield on the benchmark 10-year treasury note fell to 2.59% and USDJPY fell below 102 this morning.

The jobs figures corroborate the Fed’s view that the economy is rebounding from the weakest growth rate in a year, indicating central bankers will keep trimming stimulus. But due to the earlier winter effect, it’s still too early to call for when the soft patch is over, and the strong U.S. recovery will continue.

Falling unemployment shouldn’t reflect resilient macro fundamentals yet. The drop in the unemployment rate from March’s 6.7% came as the labour force shrank by more than 800,000 in April. The participation rate, which indicates the share of working-age people in the labour force, decreased to 62.8%, matching the lowest level since March 1978, from 63.2% a month earlier.

In China, its manufacturing contracted for a fourth month in April, according to the HSBC manufacturing final Purchasing Managers’ Index (PMI), raising the concern of the economy’s slowdown is deepening. PMI was at 48.1%. That compared with the preliminary reading of 48.3% and March’s 48%. Shanghai and Hong Kong stocks extended declines on the report, when the policymakers may have a bigger tolerance level for the growth this year, after property construction plunged last quarter and expansion cooled.

The stimulus size is relative small so far in China, and we expect this pace could be extended to June at least. The State Council has outlined a package of spending on railways and housing and tax relief to support growth and pledged extra efforts to aid exporters. The central bank has also lowered the reserve-requirement ratio for some rural banks by as much as 2 percentage points.

Top News This Week

New Zealand unemployment rate

I expect figures to come in at 5.9%

RBA Cash Rate decision

I expect figures to come in at 2.5% unchanged

Daily Market Report for 6 May 2014: Australia Trade Data And RBA Policy Are Likely To Press Aussie Lower Against Kiwi

Economic Insights

RBA rate decision is due today, expected at 2.5% unchanged

Australian Bureau of Statistics released its trade report earlier today. Exports fell 2% from month earlier, and it could be due to the recent higher currency. Imports had little change from month earlier. Lower exports growth reduced the March trade balance to A$731 million, from a revised A$1.257 billion surplus in Feb. Little price change from the Aussie dollar as investors are waiting for the rate decision and statement from the RBA.

Australia trade balance (yellow) vs. AUDUSD (white)

http://www.fxprimus.com/education/wp-content/uploads/2014/05/dmr-060514-1.png

Source: Bloomberg

Rising commodity price may offer some confidence of the recovery in Australia, when Thomson CRB commodity index rose by 9.66% since beginning of the year. However, fading inflation number and strong Aussie had refrained the central bank to offer the signal to hike its OCR in 2014. In the swap market, low bets on rate hike by end of the year are now seen since middle of March, currently standing around 10%. Treasurer Joe Hockey is going to deliver the budget estimates in a week, an above A$120 billion deficit is expected, this is certainly not advising the RBA to appear to be hawkish when more revenue needs to be generated from the country in the coming years besides tax increases and expenditure cuts. In other words, it is too early for the RBA to learn from the RBNZ, by normalising the key interest rate.

Bond investors do not believe the monetary policy tightening in the near term, when the Australia/U.S. 10 year spread narrowed to 125.8357 bps from 158.4876 bps in Oct last year. However, spread between Australia and New Zealand refused to carry on its uptrend since Sep last year reduced the possibility of further rate cut by the RBA.

Australia / U.S. 10 year spread

http://www.fxprimus.com/education/wp-content/uploads/2014/05/dmr-060514-2.png

Source: Bloomberg

New Zealand / Australia 10 year spread

http://www.fxprimus.com/education/wp-content/uploads/2014/05/dmr-060514-3.png

Source: Bloomberg

Its neighbour New Zealand, may hike the interest rate by another 50-75 bps throughout 2014, as its meaningful fundamental recovery. But in this stage, we do not hike at end of the year. Stronger AUD and fiscal deficit concern are the best reasons for the central bank to wait for a while. Besides that, the RBA is likely to wait for a few more inflation numbers before the next move.

Daily Market Report for 7 May 2014: Fundamentals vs. Policymakers’ Rhetoric

Economic Insights

RBNZ Wheeler may prepare to intervene the currency market

New Zealand has been enjoying a economic recovery with a solid momentum in the past months, and just reporting a solid labor market report this morning. However, Kiwi became the worst performer among the G10 currencies, fuelled by the RBNZ Wheeler’s speech on possible intervention.

New Zealand employers added more manpower in the 1Q this year, more than the earlier analysts estimate. Besides that, increasing people joined the workforce again, as the participating rate rebounded. The participation rate rose to 69.3 percent from 68.9 percent in the fourth quarter, reaching the all time high.

New Zealand labor market participating rate

http://www.fxprimus.com/education/wp-content/uploads/2014/05/dmr-070514-1.png

Source: Bloomberg

Employment change increased 0.9 percent, by 22,000 jobs added. The jobless rate was unchanged at 6 percent, even with the participating rate improved. Under this perspective, this type of trend even shows more healthy signs than the labor market in the United States, sending the message to the market that the recovery of the labor market in New Zealand sets to be sustainable. According to the official data, the increase of the manpower was mainly from retail hospitality and construction sectors. Economists forecast 68.9 percent.

But Wheeler’s speech made Kiwi become the worst performer among the G10 currencies today. Wheeler said the bank may be more prepared to sell the nation’s currency if the exchange rate fails to respond to a continued weakening of export prices, it would become more opportune for the Reserve Bank to intervene in the currency market to sell New Zealand dollars.

Shall we care? Yes and No. Based on those previous rhetoric from the RBNZ, the effect usually not sustainable. Even now, higher inflation and improving labor market further support the RBNZ to hike the rate for another 3-4 times in 2014. It will be positive for the Kiwi. If we stick to this perspective, we may ignore the Wheeler’s speech today, and it might even be an opportunity for investors to pick up the kiwi at a better price.

On the other hand, factors to curb the Kiwi rally are also seen nowadays. Its exchange rate could be expected to weaken if the U.S. economy continues to improve after a bad 1Q due to the weather effect. Its dairy prices has been lowered by 13.57% since the peak level in Feb this year.

New Zealand Dairy price index

http://www.fxprimus.com/education/wp-content/uploads/2014/05/dmr-070514-2.png

Source: Bloomberg

All in all, we think the chance for a real intervention in the currency market is very low. But Wheeler’s speech today has lowered the chance for the RBNZ to hike the rate by another 25 bps in June’s meeting. Short term rhetoric from the policymaker is unlikely to press the Kiwi lower in a longer period, unless the RBNZ changes its rates normalization regime to be adjusted, but the inflation and rising housing market prices not allowing the central bank to do so.

Daily Market Report for 8 May 2014: Yellen’s Testimony Lifted the U.S. Equities, But Not Greenback

Economic Insights

Mixed signal in the U.S. Treasuries market tells you the reason why the greenback has little reaction on Yellen’s speech

Federal Reserve (Fed)’s Chair of the Board of Governors, Janet Yellen made it clear that she believes the economy still requires a sizable stimulus because the labour market and inflation are well short of the Fed’s goals. Unemployment rate dropped to 6.3% last month but participating rate had also dropped. A high degree of monetary accommodation remains warranted, which is offered by Yellen in the Joint Economic Committee of Congress. Inflation is still well below the central bank’s 2% target, according to the Personal Consumption Expenditures (PCE) gauged by the Fed. In her point of view, weaknesses in the labour market exist as long as the numbers of long-term unemployed remains despite the economic outlook improves. The Treasury market yield curve steepened after her comments tempered expectations among some of the investors for a faster pace of interest-rate increases. Bonds market with the different tenor showed a very interesting message. Shorter tenor’s yield decreased as the immediate tightening fears eased. The 30-year bond yield increased as much as three basis points to 3.41% before trading at 3.4%. An increase in longer-term yields indicates investors see inflation is accelerating. The mixed signal could well explain why the U.S. dollar is refusing to go down.

Regarding the rate hike time table, Yellen said that there is no mechanical formula for when that will occur. We think the rate will stay near zero for a “considerable amount of time” after the Fed end its bond-purchase program intended to spur growth, and it will be longer than six month. Gains in household wealth from rising home prices, less drag from federal and state and local budgets, and stronger growth abroad should be the major reasons for the Fed to finish the tapering program by end of the year. But the slowdown in U.S. housing, along with “heightened geopolitical tensions” and financial stress in emerging markets will stop the Fed to discuss the rate hike planning at this moment.

China’s exports and imports unexpectedly rose in April, easing the worries on a sharp slowdown in its 2Q growth. Overseas shipments increased by 0.9% from the previous year, when figures were inflated by fraudulent invoicing same time last year. Imports gained by 0.8%, leaving a trade surplus of $18.46 billion. The strength of trade may affect chances that leaders will resort to monetary-policy easing or larger-scale stimulus rather than railway spending and tax breaks, after first-quarter growth that was the slowest in the past six periods. China will implement measures to stabilise the country’s “severe and complicated” foreign-trade situation, the cabinet said last week. Local share market immediately rose after the trade data was released, as clearer picture of the second quarter stabilisation is more warranted.

China exports year over year (YoY) (white) vs. China imports YoY (yellow)

http://www.fxprimus.com/education/wp-content/uploads/2014/05/dmr-080514.png

Source: Bloomberg

Most of the Equities indices in Asia this morning edged higher from a disappointing session yesterday. Japan Nikkei was trading 1.09% higher at this moment, and HK HSI was up by 0.71%. In the currency market, most of the currencies remain unchanged comparing to the overnight session, except for the Aussie buoyed by the higher than expected exports number in China.

Daily Market Report for 14 May 2014: Is It A Right Time To Pick Up On Chinese Stocks?

Economic Insights

Chinese officials intend to accelerate the lending as the property market called for the “help”

China’s central bank called on the nation’s biggest lenders to accelerate the granting of mortgages, a sign that the government intends to set a floor on the growth in 2014. The People’s Bank of China told 15 banks yesterday to “improve efficiency of service, give timely approval and distribution of mortgages to qualified buyers,”. It also urged lenders to give priority to families buying their first homes and strengthen their monitoring of credit risks. Premier Li Keqiang is seeking to put a floor under a slowdown in the world’s second-largest economy. The housing market has become a drag on growth as developers, facing a surplus of empty units and dropping sales, put the brakes on new construction. Home sales fell 18% in April from the previous month, according to data from the National Bureau of Statistics. Some loose monetary policy and stimulus has been expected by us earlier of the year in 1Q, as we have mentioned lots of time that the officials won’t sacrifice the social stability for pushing the agenda of reform. It helps our clients to know the right time for “In and Out”. The Shanghai Stock Exchange Property Index, which rose 0.5% in the morning trading session, trimming this year’s decline to 4.3%.

Factory production rose 8.7% in April from a year earlier, according to the data yesterday, down from 8.8% in March. Fixed-asset investment excluding rural households increased 17.3% in the first four months of the year, the slowest for the period since 2001.

China’s stocks fluctuated in the morning trading session, when many investors still wants to pick up the stocks if the benchmark index has the chance to retrace to the level near 2,000. Real-estate companies rose after the central bank asked major lenders to accelerate the granting of mortgages. China Vanke and Poly Real Estate Group climbed more than 2% after the People’s Bank of China urged lenders to give priority to families buying their first homes. It’s a sign of easing in the property sector and we need to see more follow-up measures such as the loosening of purchase restrictions to fuel a broad-based rally for stocks. Apart from that, there is nothing that can sustain the gains fundamentally.

Overnight in the United States, spending at U.S retailers held steady in April after a surge in the previous month that put economic growth on track to pick up in the second quarter. Purchases increased 0.1% to $434.6 billion following a revised 1.5% jump in March that marked the biggest gain in four years. The better than previously estimated reading at the end of the first quarter as the world’s largest economy recovered from unusually harsh winter weather will help the expansion rebound after growth stalled to start of the year. More employment opportunities would further invigorate the household spending that is benefiting those large retailers.

In Europe, German investor confidence fell for a fifth month in May in a sign of growing concern that threats from low inflation to a strong euro may undermine the recovery. EURUSD fell as low as 1.3690, the supported level we mentioned in our weekly webinar 2 days ago.

Market Brief of the Week for 19 May 2014: Global Macro Updates

Economic Insights

China Flash manufacturing Purchasing Managers Index (PMI)

Ongoing mini-stimulus carries a key function to stabilize the near-term growth. Forward looking components – New Order in the entire PMI index might bottom out in March. Still, less investment projects guild the flash manufacturing PMI well below 50 for quite some time; Full sets of the economic data for April remain very soft such as industrial production and aggregate financing, we expect the figure to be report at 48.2.

China housing market

Slowest housing growth in the past 18 months prompts the officials to ease the mortgage restrictions, defending its bottom line growth and preventing from another round of credit defaults. President Xi calling for the country to adapt a “new normal” of slow growth last week eliminates the stimulus in a substantial level. Rising inventory and growth risk will continue weigh on the property sectors, limiting the price gain to the upside.

Euro Central Bank (ECB) monetary policy

Now the question is not whether to ease, but how to ease in the coming policy meeting after the 1Q Gross Domestic Product (GDP) missing the estimation, falling confidence index and higher Euro. Cutting the lending rate further will not be enough because the rate is close to zero now. Lowering the deposits rate to negative territory could be a “transition move” for the more aggressive measure in the future. Asset-Backed Security (ABS) purchasing in the private sectors is ultimately needed as falling lending is the main responsibility for the current subdued inflation.

Euro – Dollar forecast in the near term

Various economic data could remain the same in the upcoming weeks, giving the ECB full controlling power of the Euro-Dollar direction in 2 weeks. Mario Draghi left no room to “stay put”, and it is extremely unlikely for him to provide with an opportunity for the investors to gain the hope on the Euro again. Downside risk for the single currency well remains despite low chance for the Quantitative easing (QE) announced, either charging for the excess cash parked with them or end the Significant Market Power (SMP) sterilization maybe good enough to send the currency lower for the short run.

Greenback is undervalued

Greenback will be soft before the yield of U.S. Treasuries stabilized. Tightening bets have been withdrawn tremendously recently. Dollar responded asymmetrically to the data recently with a downward bias, largely due to Yellen’s a few speeches consistent highlighting the “slack” in the labour market. The recovery of the greenback could be delayed until the late 3Q when the QE comes to the end.

Equities and Bonds market

Broad sound of the 1Q U.S. corporate earnings implied the improving corporate confidence, and policy remains accommodative in the coming months at least. Bonds rally fuelled by the major global central banks produces another round of “sovereigns’ fever”, disguising a “risk off” environment especially the prices are hovering in the historical high. We remain positive on the U.S. equities in the coming few months.

Daily Market Report for 20 May 2014: Aussie Lower on Reserve Bank of Australia (RBA)’s Meeting Minutes

Economic Insights

Did the RBA Minutes of May Meeting offer any clues to the biasness of its currency?

Key takes of these Minutes are the inflation will be contained over next 2 years and growth in coming quarters likely below trend due to slower growth in exports, decline in mining investments and planned fiscal consolidations. They have no intention to tighten up at this stage like its neighbour – Reserve bank of New Zealand (RBNZ) unless fundamentals surprise the RBA. Aussie prefers to stay soft when the demand from China has been weakening.

RBA Cash Rate (white) vs. AUDUSD (yellow)

http://www.fxprimus.com/education/wp-content/uploads/2014/05/dmr-200514-1.png

Source: Bloomberg

Australia’s central bank signalled record-low interest rates are set to remain in place as inflation is contained and the economy adjusts to fewer resource projects. Notes indicated that overall growth in the coming quarters was likely to be below trend given expected slower growth in exports, the decline in mining investments and the planned fiscal consolidations. The current accommodative stance of policy was likely to be appropriate for some time yet. Governor Glenn Stevens has held borrowing costs as the government prepared a fiscal tightening strategy set to drag on growth. Low borrowing costs are driving up home prices, underscoring why the RBA may be reluctant to add to 2.25 percentage points of rate cuts since late 2011. With growth in activity expected to pick up only gradually, and spare capacity in the labour market consequently remaining for some time, growth in domestic costs was forecast to remain contained.

Aussie has climbed almost 4% in the past three months as traders bet the RBA’s easing cycle has ended. The central bank said low borrowing costs and rising house prices had supported household consumption.

In China, property investment in China to Gross Domestic Product (GDP) ratio is more than 15%, and that doesn’t include its related industries. Banks’ exposure to the property – related products and companies could be far beyond our knowledge in its shadow banking system. Previous mortgage restrictions could be starting to ease gradually from now among the different cities, preventing from a sharp growth downturn and credit risk. We do not expect the officials to exercise the harsh policy this year on the concern of the stability.

Japan will hold the policy meeting tomorrow. Upswing 1Q GDP and inflation extended from 2012 allows the Bank of Japan (BOJ) to stay “on hold” for a while when the falling exports are yet severe enough to bring BOJ’s attention. We expect the earliest timing for the BOJ to act further will be late 3Q. Yen may continue to stay strong against the greenback in the near term on ‘muted BOJ” and “dovish Federal Reserve (Fed)”, plus the rising regional geopolitical conflicts favouring the Yen.

Japan exports YoY (yellow) vs. Japan CPI YoY (white)

http://www.fxprimus.com/education/wp-content/uploads/2014/05/dmr-200514-2.png

Source: Bloomberg

Daily Market Report for 22 May 2014: Fed Talked the Exit Strategy, and No Inflation Risk Expected

Economic Insights

Highlights from the FOMC Minutes

Federal Reserve officials last month discussed a range of tools they could use to control short-term interest rates once they decide on the first increase in borrowing costs since 2006, according to the Minutes released overnight. Among the tools were overnight reverse repurchase agreements, the term deposit facility, and interest paid on the excess reserves that banks hold at the Fed. While no decisions were made after officials heard a staff presentation on the tools, participants generally agreed that starting to consider the options for normalisation at this meeting was prudent. The Fed is trying to decide on its strategy well ahead of the time when it will actually use it, and they are very careful to note that just because they are talking about it doesn’t mean it’s coming soon. Market stays calm after the Minutes as benchmark index DJIA extended its Friday gain, and closing at 0.97% higher; U.S. 10 year yield remains low at 2.5553%.

U.S. 10 years yield remains low

http://www.fxprimus.com/education/wp-content/uploads/2014/05/US-10-year-yield-remains-low.png

Source: Bloomberg

The benchmark lending rate has been held in a range of zero to 0.25% since December 2008. Fed officials forecast in March that the rate would be 1% at the end of 2015 and 2.25% at the end of 2016, according to the median estimates. Participants at the April meeting agreed that “early communication” of their exit strategy “would enhance the clarity and credibility of monetary policy,” the minutes showed. The Fed has pushed up assets on its balance sheet to a record $4.34 trillion as it engaged in three rounds of large-scale purchases of Treasuries and housing debt intended to push down long-term interest rates and spur the economy.

Federal Reserve policy makers, weighing options for an eventual exit from extraordinary easing, said continued stimulus to push unemployment lower doesn’t risk sparking an undesirable jump in the inflation rate. With inflation expected to remain well below its 2% goal, the Federal Open Market Committee doesn’t face a trade-off between its employment and inflation objectives, and an expansion of aggregate demand would result in further progress relative to both objectives.

Yesterday, BOJ refrained to add further stimulus from the current pace. Upswing 1Q GDP and April exports rebounded even with a stronger Yen allowed the BOJ to stay “on hold”. Most importantly, Kuroda strongly believes the inflation will continue to rise. Now the macro condition in Japan favours the government to implement the third arrow – structural reform, which is the hardest but most needed for the long term benefit. We think the earliest time for them to accelerate the purchasing will be October at least.

Greenback will be staying soft before the yield of U.S. Treasuries is stabilised. Dollar responded asymmetrically to the data recently with a downward bias. As long as Yellen continue to consistently stress the “slacks” in the labour market, a sustainable recovery of the greenback could be delayed until 3Q when the QE comes to the end. But we think the BOJ will stand up to defend if the USDJPY threatened to fall below 100.

Daily Market Report for 5 June 2014: Market Awaits European Central Bank (ECB)’s Decision

Economic Insights

Today belongs to Mario Draghi

The ECB president holds a press conference 45 minutes after the rate announcement at Frankfurt. Which interest rates will Draghi cut, and how far? The majority of economists predict the ECB will become the first major central bank to introduce a negative deposit rate. But deflation can create a slow-growth trap from which it can be extremely hard to escape. The expectations of lower prices becomes a self-fulfilling prophecy, and aggregate demand gets sucked out of the system. It is no coincidence that prices are falling in Europe at the same time that euro zone Gross Domestic Product (GDP) growth has slowed to a crawl — just 0.2% as of last quarter.

Euro-area services output expanded at the strongest pace in almost three years last month, helped create jobs in a region suffering from low inflation . A Purchasing Managers’ Index (PMI) rose to 53.2 from 53.1 in April. In a sign of how fragile the economy remains, separate data showed consumer spending barely grew in the first quarter and net trade subtracted from growth. Although the euro zone is enjoying its best performance in three years, this is an uneven, stuttering and lacklustre recovery. While payrolls are rising, the pace of growth is “too low to generate enough job creation to bring unemployment down to any significant degree. The ECB ’s Governing Council meets today, where it will probably lower its economic forecasts and add stimulus.

U.S. shares rebounded on Wednesday after strong data on the U.S. services sector, while soft European economic data weighed on European equities and weakened the euro a day ahead of a closely watched ECB policy meeting. Better-than-expected U.S. services sector growth drove gains on Wall Street and boosted the Standard & Poor's (S&P) 500 to a record closing high, reversing the earlier losses on an industry report showing weakness in the U.S. private-sector labour market. Yields on benchmark 10-year U.S. Treasury notes edged higher.

The Institute for Supply Management said its U.S. services sector index rose to 56.3 in May from 55.2 in April, topping the expectations for a read of 55.5. A reading above 50 indicates expansion. Earlier, the Automatic Data Processing (ADP) National Employment Report showed about 179,000 private-sector jobs were added in May, below the 210,000 that had been expected. April's job gains were revised downward by 5,000.

The Dow Jones industrial average .DJI closed up 15.13 points or 0.09%, to 16,737.47, the S&P 500 .SPX gained 3.62 points or 0.19%, to 1,927.86 and the Nasdaq Composite .IXIC added 17.562 points or 0.41%, to 4,251.642.

Daily Market Report for 06 June 2014: It Is Not Enough

Economic Insights

Market questioned Draghi in the end

Mario Draghi unveiled an unprecedented round of measures to help the European Central Bank (ECB)’s record-low interest rates feed through to an economy threatened by deflation. The ECB has cut its deposit rate overnight to minus 0.1%, becoming the first major central bank to take one of its main rates negative.

ECB refi-rate (white) vs. EURUSD (yellow)

http://www.fxprimus.com/education/wp-content/uploads/2014/06/dmr0606.png

Source: Bloomberg

In a bid to get credit flowing to parts of the economy that needed it, the ECB also opened a 400-billion-euro liquidity channel tied to bank lending and officials will start to work on an asset-purchase plan. While conceding that rates are at the lower bound “for all practical purposes,” the ECB president signalled policy makers that are willing to act again. “We think it’s a significant package,” Draghi said yesterday. “Are we finished? The answer is no.” A worsening in the euro area’s economic outlook and a prolonged spell of slow inflation prompted the ECB to act to preserve the fragile recovery in the world’s second-largest economy. Ultra-loose monetary policy so far hasn’t benefited all parts of the 18-nation bloc, with bank lending in the region still shrinking even after sovereign bond yields from Spain to Italy has dropped to record lows.

Draghi announced a new liquidity program designed to encourage more lending. Financial institutions will be allowed to borrow money from the ECB equivalent to as much as 7% of their outstanding loans to non-financial corporations and households, excluding mortgages. The maturity will be up to four years, priced at the ECB’s benchmark rate when the loans are taken out plus 0.1 percentage points. Banks that don’t pass the money on will be obliged to repay it after two years. The so-called targeted longer-term refinancing operations, or TLTROs, will be carried out in September and December. The central bank also said that it would push on with plans that could see it buying asset-backed securities based on bank loans. That measure could help to smoothen lending by helping banks manage risks.

The ECB’s hand has been forced by the Eurozone’s sluggish economic recovery, which is so feeble that it is proving hard to shrug off deflationary effects. In May the regional consumer price index rose by just 0.5% from a year ago. But that aggregate figure, is already well below the ECB’s target of about 2%, masks lower rates in many countries. Some have even experienced falling prices. Excessively low inflation threatens to make the sustainability of sovereign debt as an impossible challenge.

Negative deposit rates are the unusual part of the package, but their effectiveness is questionable. European banks’ deposits at the ECB have fallen close to zero in the past several months, and their reserve holdings at the ECB, to which negative rates will also apply, have also diminished significantly. The negative interest rate, therefore, is unlikely to have a significant effect on the banks’ behaviour. The LTRO facility might help at the margin to boost lending to the private sector. But regulations are forcing banks to shrink their balance sheets. Many lenders have amassed huge holdings of government bonds. And loan demand by companies is weak anyway.

In China, Chinese local governments have won the permission to issue bonds as they seek to reorganize 17.9 trillion Yuan debt. Bond bears contends that bond sales will ease refinancing and lessen the risk of defaults. Bonds may also boost transparency and cut down systemic risks by shifting debt to regulated markets from the opaque shadow-banking operations. The government has approved 400 billion Yuan worth of bond sales annually under a trial program.

Market Brief of the Week for 9 June 2014: U.S. Labour Market Remains Solid After The Weakened State In Winter

Economic Insights

U.S. May payrolls exceeded the forecast, with a report of 217,000 expansion

U.S. employment returned to its pre-recession peak in May with a solid pace of hiring that offered confirmation that the economy has snapped back from a winter slump. Nonfarm payrolls increased 217,000 last month, still in line with the market expectations. The nation finally recouped the 8.7 million jobs lost during the recession, with 8.8 million more people working now than at the trough in February 2010. But the working age population has since increased 10.6 million while 12.8 million Americans have dropped out of the labour force.

U.S. Nonfarm Payroll (white) vs. US total employment level

http://www.fxprimus.com/education/wp-content/uploads/2014/06/mbow-09062014-1.png

Source: Bloomberg

The pace of hiring adds to data from automobile sales to services and factory sector activity that have suggested the economy will grow at a pace of more than 3.0% this quarter after shrinking at a 1.0% rate in the first three months of the year. Other data on Friday showed that consumer credit in April recorded its largest advance since November 2001, a sign that households were feeling more secure in taking on debt.

More of the previously discouraged workers are to re-enter the labour force over the course of the year. While that would be a sign of confidence in the labour market, it could slow the decline in the jobless rate. The long-term unemployed accounted for is 34.6% of the 9.8 million jobless Americans, moved down from the 35.3% back in April. The median duration of unemployment fell to 14.6 weeks, which is the shortest stretch in five years and a sharp drop from April. The return of discouraged job seekers and the drop in long-term unemployment will be welcomed by the Federal Reserve (Fed), which has cited low labour force participation as one of the reasons for maintaining an extraordinarily easy monetary policy.

Average hourly earnings, which are being closely watched for signs of wage pressures that could signal dwindling slack in the labour market, rose five cents, or 0.2%. On a year-over-year basis, earnings were up a tepid 2.1%, suggesting little build-up in wage inflation.

US. Average hour earning

http://www.fxprimus.com/education/wp-content/uploads/2014/06/mbow-09062014-2.png

Source: Bloomberg

China’s exports had rose more than analysts estimated in May, helping to cushion the world’s second-biggest economy from a deeper slowdown as an unexpected slump in imports highlighted risks to growth. Overseas shipments gained 7% from a year earlier. Imports fell 1.6%, leaving a $35.92 billion trade surplus, the biggest in five years according to Bloomberg data. Stronger exports may bolster Chinese leaders’ confidence that a recovery in demand from the U.S. and Europe will support economic growth and reduce the need for stronger stimulus. On June 6, Premier Li Keqiang told officials from eight places, including Beijing, Guangdong, Zhejiang and Hebei, to be proactive in supporting their local economies, saying that the government wants a “reasonable” rate of expansion.

China export YoY (white) vs. China trade balance (yellow)

http://www.fxprimus.com/education/wp-content/uploads/2014/06/mbow-09062014-3.png

Source: Bloomberg

Daily Market Report for 10 June 2014: China Is Getting Warmer Now, Summer Is Here

Economic Insights

China inflation edged higher, while the central bank, People’s Bank of China (PBOC) announced the Required Rate of Return (RRR) cut for selective banks

China’s inflation accelerated in May to the fastest pace in four months on food costs, while a decline in factory-gate prices moderated. Consumer prices rose up 2.5% from a year earlier, the statistics bureau said today in Beijing. That exceeded the median estimate done by the various channels. The producer-price index fell 1.4% after a 2% decline in the previous month. Inflation gauged indices suggested that the economy is getting warming up now, after many rounds of “mini-stimulus” China had implemented in the second quarter.

China CPI YoY (white) vs. China PPI YoY (yellow)

http://www.fxprimus.com/education/wp-content/uploads/2014/06/dmr-100614-1.png

Source: Bloomberg

Inflation below the government’s full-year target of 3.5% leaves room for more monetary easing in an economy projected to grow this year at the slowest pace since 1990. While Premier Li Keqiang is resisting broad stimulus, limited loosening includes yesterday’s announcement of a cut in some banks’ reserve requirements from June 16, intended to support agriculture and small businesses. Food prices rose up 4.1% from a year earlier, compared with a 1.7% gain for non-food costs.

A slide in home sales and construction and government efforts to rein in credit risks are weighing on the nation’s expansion. Yesterday China’s central bank announced a 0.5 percentage point cut in reserve requirements for some banks, giving details of a policy move aimed at supporting smaller companies and agriculture.

The reduction will take effect on 16th June, the PBOC said in a statement on its website yesterday. The change applies to two-thirds of city commercial banks, 80% of non-county level rural commercial banks and 90% of non-county level rural cooperative banks.

Falling imports in May showed the weakness in domestic demand that is making the Chinese economy more reliant on exports and pressuring Premier Li Keqiang to roll out broader measures to support growth. The authorities’ steps so far have included tax breaks and accelerating some government spending as a property slowdown limits the nation’s expansion.

Yet, we think the current stimulus measures are to “halt the systematic risk” instead of “providing a major growth”.

http://www.fxprimus.com/education/wp-content/uploads/2014/06/dmr-100614-2.png

Source: Bloomberg

Daily Market Report for 11 June 2014: What Is Holding The Federal Reserve (Fed) Back From Normalising The Monetary Policy?

Economic Insights

Something might be different this summer at the Federal Open Market Committee (FOMC) meeting in a week time.

U.S. benchmark equities indices stumbled this week and the Dow Jones Industrial Average (DJIA) refused to reach above the territory of 17,000. The unclear Fed policy in the second half of the year and the extreme low volatilities with falling trading volume could discourage further risk taking in the capital market, until the Fed decides to offer further clue in the upcoming FOMC meeting next week.

Whether the Fed should continue to promote its “accommodative” stance, or start putting the possible exit strategy on the table to be discussed upon is widely the focus in the market now. As a matter of fact, the U.S. economy has made a terrific progress in the first six months of the year. Jobs market has returned to the peak level before the latest financial crisis based on the headline numbers that is if we do not put those components such as wage growth, labour participating rate into consideration. Inflation climbed higher although it’s still well-below the Fed’s long term objective as Core Personal Consumption Expenditures (PCE) had climbed to 1.4% YoY.

U.S. U3 unemployment rate (yellow) & U.S. PCE YoY

http://www.fxprimus.com/education/wp-content/uploads/2014/06/dmr-110614-1.png

Source: Bloomberg

The FOMC is much closer to its goals than it ever did in the past five years, based on one of the Fed’s own models, which clearly shows that the distance from the long term objective has been closer to 75% of the period since 1960.

http://www.fxprimus.com/education/wp-content/uploads/2014/06/dmr1106-4.jpg

http://www.fxprimus.com/education/wp-content/uploads/2014/06/dmr-110614-2.png

Source: Federal Reserve

If this is the real scenario for the current U.S. economy, we would like to question that if the current zero interest rate policy is the correct monetary policy, and what is holding the Fed back to normalise the interest rate in a gradual pace. The housing market recovery and rising volatilities could be the reason. U.S. pending home sales have yet to show the sign of a solid recovery. The good news is that the housing supplies have been increasing since beginning of the year. Under this perspective, the Fed could prefer a low Mortgage rate to support the activities since this is a pillar industry. Besides that, construction sector had created the least jobs in May, bringing the concern on the housing market’s recovery. Fear of rising volatilities to steepen the long term curve is another reason for the Fed to remain its monetary policy accommodative.

U.S pending home sales YoY (white) vs. U.S. houses supply MoM (yellow)

http://www.fxprimus.com/education/wp-content/uploads/2014/06/dmr-110614-3.png

Source: Bloomberg

However, we are expecting something different in a week time. As mentioned above, we are no longer in the crisis, hence the crisis management mode shall be gradually removed. Otherwise, it will dampen the economy because no policy carries the function to solve all the problem. There are tremendous concerns if the rates stay low for too long in a moderated growth pace, since it has reached the place that zero interest-rate policy (ZIRP) has limited functions to help the Fed to achieve its long term objectives under its dual mandate.

1) Over-promoting the risk taking, misleading the asset classes and distorting the assets-allocation

2) Lower rates do not help the deposit growth in the financial system, instead of encouraging the “risk investing”. Could this dampen the consumption? Maybe.

3) Labour will be more expensive, as the companies could gain the cheap financing to purchase the machine and hardware to replace the humans.

Daily Market Report for 12 June 2014: Another Hike from the RBNZ

Economic Insights

RBNZ raised the OCR to 3.25% by a 25 bps hike

New Zealand’s central bank raised interest rates for the third time this year and signalled more tightening to come as Christchurch rebuild and surging immigration to fuel growth, sending the kiwi higher. “It is important that inflation expectations remain contained and that interest rates return to a more neutral level,” Governor Graeme Wheeler said after increasing the official cash rate by a quarter-percentage point to 3.25%. The Reserve Bank of New Zealand (RBNZ) left its forecast for the 90-day bank bill rate broadly unchanged; suggesting borrowing costs may rise twice more this year.

RBNZ OCR rate

http://www.fxprimus.com/education/wp-content/uploads/2014/06/dmr-120614.png

Source: Bloomberg

Bank of Japan (BOJ) officials are considering maintaining a large balance sheet for the central bank even after it achieves its inflation target, reducing the risk of a surge in long-term bond yields. Under the potential strategy, the BOJ would use cash from maturing securities in its portfolio to buy long-term government debt. Governor Kuroda and his colleagues have yet to meet their inflation target, and pledge to continue asset purchases until consumer prices are rising at a 2% pace. The possibility of permanently large balance sheets — in Japan’s case, now amounting to more than half the size of the economy, may become a global legacy of unprecedented stimulus measures. The BOJ discussions parallel preparations at the Federal Reserve to avoid an exit strategy of asset sales.

The central bank’s balance sheet has expanded to 52% of gross domestic product since Kuroda unleashed record easing in April 2013, compared with 25% for the Fed and 24% for the Bank of England. The BOJ held 165 trillion yen of long-term Japanese government bonds as of May 31. In the U.S., Fed officials are preparing to keep their balance sheet close to record levels for years on concern that selling bonds from a $4.3 trillion portfolio could crush the U.S. recovery. Minutes of their last meeting made no mention of asset sales. Officials worry that such sales would spark an abrupt increase in long-term interest rates, making it more expensive for consumers to buy goods on credit and companies to invest, according to James Bullard, president of the Federal Reserve Bank of St. Louis.

Japan 10-year bond yields remain the lowest in the world, trading at about 0.6%, even as BOJ starts to drive inflation higher. Consumer prices excluding fresh food rose 1.5% in April from a year earlier, based on a BOJ estimate stripped of the effect of a sales-tax increase. If the BOJ prolonged large-scale bond purchases after reaching its inflation goal, it would need to avoid creating the impression that it was financing government spending. Any extension of the purchases would come only after a debate, since not all of the people taking part in BOJ discussions say they would be in favour. The central bank’s next policy decision will be tomorrow, with projecting no change in a policy of expanding the monetary base at a pace of 60 trillion yen to 70 trillion yen per year.

Daily Market Report for 13 June 2014: Will The Fed Follow What BOE Will Do Today?

Economic Insights

Bank of England sets a strong signal to hike the interest rate earlier next year

Mark Carney from BoE has hinted households, companies and financial markets to prepare for an interest rate rise, sell side, buy side, upside, downside saying the first increase could happen sooner than markets currently expect. Sound familiar? Does that apply to the Fed as well in 5 days?

In his first hawkish comments since becoming governor of the Bank of England (BoE) almost a year ago, Mr Carney stressed overnight that the widely anticipated action by the central bank this month to cool the housing market will not be a substitute for gradual interest rate rise. Having last year guided people to expect rates to remain at the emergency level of 0.5% until 2016, financial markets currently expect the first rise in spring 2015.

“There’s already great speculation about the exact timing of the first rate hike and this decision is becoming more balanced,” Mr Carney said. The governor’s remarks will heighten expectation that the BoE will be the first major central bank to raise rates since the immediate aftermath of the financial crisis.

Still, Carney’s words do not represent a U-turn from the BoE’s revised guidance in February that when it comes to tightening policy, it will raise rates gradually and to a level significantly lower than the 5% level previously thought standard. Another similar story will be adopted by the Fed?

China’s new Yuan loans and money supply topped estimates in May as the government supports economic growth while reining in shadow banking. New Yuan loans were 870.8 billion Yuan, the People’s Bank of China said yesterday, higher than earlier estimates. M2 rose 13.4%. China is still concerned of missing a 2014 target for economic growth of about 7.5%, then prompting to speed up government spending and make limited cuts to lenders’ reserve requirements. The World Bank warned last week that rapid credit growth and debt accumulation by local governments are risks to financial stability. It suggests that policy makers are turning more serious about the downside risks to the economy and began ramping up pro-growth measures. Shadow Banking Aggregate financing, China’s broadest measure of new credit was 1.4 trillion Yuan in May, matching the median analyst estimate. The figure, which includes bank lending, corporate bond issuance and shadow-banking products like entrusted loans, compared with 1.55 trillion Yuan in April.

In Japan, The Bank of Japan maintained record stimulus as Governor Haruhiko Kuroda strives to boost inflation that remains short of a 2% target. The central bank will continue to expand the monetary base at a pace of 60 trillion Yen to 70 trillion Yen per year. A rebound in consumer sentiment and signs of strength in business investment indicate the world’s third-biggest economy is weathering a higher sales tax so far. At the same time, the yen’s 3% rise against the dollar this year threatens to undercut inflation, as the BOJ is likely to remain inactive for the next several months.

Daily Market Report for 8 July 2014: China Anti-Corruption Policy

Items to watch in this report

China corruption crackdown could hurt the market growth in the near term

China’s corruption crackdown is probably not the villain in the growth slowdown drama, as shown by growth in public spending and infrastructure investment, as well as anecdotal evidence from spending on some luxury items. General Secretary Xi Jinping continues to widen his corruption dragnet. Expelled from the Communist Party for bribery, he joins a roll call of senior leaders from central ministries, provincial governments and state-owned enterprises who China said were caught with their hands in the cookie jar.

Most of the time, corruption is bad for a nation’s growth. It encourages businesses and bureaucrats to engage in rent-seeking behavior rather than focusing on productive investments. It also fosters inequality that worsens social tensions. Whatever benefits there might be from greasing the wheels to get things done are not sufficient to offset those costs.

China however appears to be an exception to the rule. On Transparency International’s Corruption Perception Index, it scores above average in terms of corruption. China has recorded three decades of super-charged growth nonetheless. That begs the question: if high levels of corruption coincided with strong growth, will an anti-graft crackdown push the dial lower?

In theory, the answer is yes. The logic is simple enough. A culture of banqueting, gift giving and kick-backs paves the way to everything from government contracts for infrastructure projects to M&A deals.

A high-profile anti-corruption campaign could mean cancelled bookings at karaoke bars, less spending at luxury stores, and critically a much slower approval process of business permits and investment projects. In practice, the evidence is mixed. True, retail sales of jewelry, widely used in gift giving, are not glittering as they used to. Audis, a favorite auto for Chinese officials are not rolling out of the showroom as fast. At the same time, though, sales of Kweichow Moutai, the preferred tipple at Chinese banquets, were up 32.2% in the second half of 2013. Macao’s baccarat tables continue to welcome growing numbers of high-rolling gamblers.

German Chancellor Angela Merkel’s China visit has been marked by a spate of deals, including a new VW car plant in China. Less in evidence has been any discussion of the exchange rate, despite a fall in the Yuan from 8.34 to the Euro at the end of 2013 to 8.43 on Monday. U.S. delegates arriving for their summit with China this week might be more vocal.

Daily Market Report for 9 July 2014: Slow Inflation Growth in China May Favor the Aussie

Items to watch in this report

China’s factory-gate price changes add to signs of stabilisation in the world’s second-largest economy

China’s factory-gate prices fell in June at the slowest pace in more than two years, adding to signs of stabilisation in the world’s second-largest economy. The producer-price index declined 1.1% from a year earlier, same as our forecast in Bloomberg. The consumer-price index increased 2.3%. Inflation remaining below the official goal of 3.5% gives Premier Li Keqiang room for additional stimulus if needed to deal with threats including a property-market slump. Lower inflation in China suggests that the officials still have plenty of room to exercise the stimulus measures in 2H, no matter whether it will be fiscal measures or monetary policies. Aussie and Kiwi could be the beneficiaries here.

The easing of factory deflation follows reports showing that manufacturing has expanded at a faster pace last month, indicating that the government efforts including speeding up infrastructure spending are helping to defend the economic-growth target for the year of about 7.5%. Consumer inflation suggests aggregate demand is still weak and the pace leaves enough space for additional mini-stimulus measures if that is necessary.

The targeted easing measures are likely to continue in the coming months. Government seems to not allow the growth to drop below 7.5% according to Li a month ago. China Banking Regulatory Commission (CBRC) announced that in order to adjust the methodology of the Loan to Deposit ratio calculation, they are aiming to boost the lending for small and medium enterprises (SME) and companies in rural area. Avoiding the rates to hike by a possible “interest rate corridor mechanism”, easing the property purchasing and lending restrictions as well as accelerating the fiscal spending could be the main tools.

Heavy selling off in the U.S. has happened overnight. Investors will be scouring the minutes of the Federal Reserve (Fed)’s June policy meeting, which is due to be out later on Wednesday, for any hints of a more aggressive tone. But the general view has been that the recent signs of improvement in the labor market would not have been enough to cause the US central bank to deviate from its current policy path.

Everything is still very calm now. Market has sharply scaled back to their bearish bets and the value of stocks is about to fall, with the proportion of shares earmarked for short selling at its lowest level since before the financial crisis despite warnings of renewed market enthusiasm.

The percentage of stocks that have been borrowed by short sellers who try to profit from a company’s share price falling has dropped to the lowest level in the US, UK and the rest of Europe since the years before the collapse of Lehman back in 2008.

Buoyed in parts by injections of cheap money from central banks, including the Fed asset-purchase program, leading stock markets have continued to rise this year after enjoying strong gains in 2013, forcing some hedge funds to cut their short bets to avoid being squeezed.

Daily Market Report for 10 July 2014: No Surprise from China June Exports, Federal Open Market Committee (FOMC) Minutes

Items to watch in this report

Federal Reserve (Fed) policy makers were concerned that investors may be growing too complacent about the economic outlook

Some Fed policy makers were concerned that investors may be growing too complacent about the economic outlook and the central bank should be on the lookout for excessive risk-taking, according to the minutes of their June meeting.

Signs of increased risk-taking were viewed by some participants as an indication that market participants were not factoring in sufficient uncertainty about the path of the economy and monetary policy, the minutes showed. Fed officials expressed concern about low volatility inequity, currency and fixed-income markets. At the same time, it was noted that monetary policy needed to continue to promote the favorable financial conditions required to support the economic expansion.

Officials also agreed that their bond purchase program would end with a final reduction of $15 billion in buying at their October meeting if the economy progresses as they expect. At its June meeting, the FOMC continued cutting the monthly pace of asset purchases, reducing it by $10 billion for a fifth straight meeting, to $35 billion.

Exit Strategies are the main focus now. Central bankers continued discussions of a strategy for the eventual exit from the unprecedented monetary easing. It was observed that it would be useful for the committee to develop and communicate its plans to the public later this year, well before the first steps in normalizing policy become appropriate.

Many participants agreed that it “would be best” for the Fed to end reinvestment of maturing securities only when it raises rates for the first time since 2006, or even afterward. Most preferred to end after.

Fed officials are closing in on their goal of full employment faster than they had forecast, forcing them to consider accelerating their first increase in the main interest rate in eight years. The Fed has said rates are likely to remain low for a “considerable time” after it ends large scale asset purchases that are set to wind down by year end. Fed officials said in a statement after the June gathering that the economy is rebounding and will continue to expand at a moderate pace.

Better than expected employment data have brought forward expectations for higher rates. Unemployment fell to an almost six-year low last month, strengthening the case for officials to raise the main rate earlier than they had forecast. Payrolls surged in June by 288,000 workers, according to a Labor Department report released last week. The jobless rate fell to 6.1%, a level that policy makers didn’t expect to see before the end of the year.

Fed officials predicted at their June meeting that unemployment would decline to 6% – 6.1% by the end of this year. It was 6.3% in April and May.

In China, its exports slightly trailed estimates in June, suggesting support for growth from global demand will be limited as leaders try to defend their economic-expansion goal of about 7.5% this year. Overseas shipments had gained 7.2% a year earlier. Imports rose 5.5%, leaving a $31.6 billion trade surplus.

Market Brief of the Week for 14 July 2014: How will the Chinese demands influence the Aussie dollar from now on?

Economic Insights

Chinese easing on lending could fail to boost the value of Aussie

Bond issuance by Chinese banks looks set to extend a 46% first-half jump, after regulators adjusted the loan-to-deposit ratio principles to help spur growth in the world’s second-largest economy. While the China Banking Regulatory Commission (CBRC) is limited by a law that says lenders can only advance 75% of their deposits, it eased the interpretation by excluding loans funded by long-term bonds from the calculation effective July 1.

The boom will boost credit expansion that fell to a three-month low in May. Demand for the increased supply of securities has been supported by the People’s Bank of China (PBoC), which has lowered financing costs by injecting cash into the interbank market and cutting reserve-ratios for some lenders.

Australia exports contribute around 20% to its Gross Domestic Products (GDP), and China is its top market. Overcapacity in the Chinese steel sector sets to limit the gain of the Aussie for longer time. But if the rising Producer Price Index (PPI) in China is sustainable in the coming months, which will be a positive sign for the Aussie as the Chinese industrial demand is sure to pick up. Still, we have a relatively dovish Reserve Bank of Australia (RBA) to cap the gain of Aussie.

Investors are moving on from last week’s Euro-zone banking wobble, nudging stocks back towards recent highs and trimming exposure to supposed safety plays such as “core” sovereign of debt and gold. The jitters have sent government borrowing costs much higher, threatening to reverse the favourable bond yields that Portugal had been enjoying since exiting its three-year adjustment programme in May. The stock market has also fallen sharply.

Government ministers and the Bank of Portugal have sought to reassure investors that the problems can be contained. Banco Espirito Santo (BES) is not at risk, they say, much less than the financial system as a whole. Officials believe that ring fencing BES from the financial woes of the Espirito Santo group, its biggest shareholder with 25%, will both protect the bank and prevent the contagion spreading to rest of the financial sector.

The mood is generally positive as traders prepare for a busy week of US corporate earnings; important economic data from China and the US; and possibly further monetary policy clues from central bankers.

Investors are also wary about a shift in the market’s expectations of monetary policy trajectory and there will be plenty of events for them to absorb in that regard this week.

Possibly the main catalyst will be Federal Reserve chairwoman Janet Yellen’s two-day testimony before Congress, starting on Tuesday. Her comments will be scrutinised for any indication of the Fed’s timing for an interest rate rise; currently deemed likely the middle of next year.

Daily Market Report for 16 June 2014: China Reported A Better Than Expected 2Q Gross Domestic Products (GDP)

Economic Insights

China GDP rose 7.5% YoY in second quarter after the government stimulus kicks in

China’s economic growth has finally accelerated from three quarters deceleration after the government sped up spending and freed up more money for loans to counter a property slump.

Its GDP rose up 7.5% in the second quarter on a year on year basis, compared with the 7.4% median estimate, but it’s in line with our forecast earlier. June industrial production and first half fixed asset investment exceeded projections as well. Industrial production rose to 9.2% in June from a year earlier. Retail sales have increased 12.4% from a year earlier. Fixed asset investment excluding rural households increased 17.3% in the first half from a year earlier.

China GDP YoY

http://www.fxprimus.com/education/wp-content/uploads/2014/07/dmr-160714-1-600x150.png

Source: Bloomberg

Premier Li Keqiang’s government has brought forward the railway spending, reduced reserve requirements for some lenders and cut taxes to protect an annual growth goal of about 7.5% that’s under threat from a plunge in property construction and weaker home price gains.

The government has also weakened the Yuan, which was down about 2.5% against the dollar this year through yesterday. Easier credit may support regional governments in their own stimulus plans, as provinces were hit hard by slumps in energy and resources, when announced investments last month after first-quarter growth trailed their annual targets.

Overnight, Federal Reserve (Fed) Chair Janet Yellen told lawmakers the central bank must press on with record monetary stimulus to combat the persistent job-market weakness. “There are mixed signals concerning the economy,” Yellen said in response to questions during testimony to the Senate Banking Committee today. “We need to be careful to make sure that the economy is on a solid trajectory before we consider raising interest rates.”

Yellen said in her semi-annual testimony that “Although the economy continues to improve, the recovery is not yet complete,” which hints that a high degree of monetary policy accommodation remains appropriate. While unemployment fell to 6.1% last month, some of the labour-market gauges watched by Yellen shows continued weakness. The participation rate, which measures the share of working-age people in the labour force, was 62.8% last month, matching the lowest level since 1978. Among the unemployed, about a third has been out of work for six months or longer.

Even before the latest jobs report, Federal Open Market Committee (FOMC) participants raised their projections for the main interest rate for the next two years, while continuing to predict that the first increase would only occur next year.

UK inflation rose to 1.9% YoY yesterday, and sterling surged. The chance is extremely high especially after the inflation released yesterday is reaching its target at 2%. Also its housing inflation surged to 10.5% in May, highest in the past 4 years. Current macro-prudent policies may not be enough to contain the heating housing market, promoting the Bank of England (BOE) to raise the rate as early as next quarter. But we think the tepid wage growth could allow the BOE to wait until 1Q next year.

UK CPI YoY (white) vs. GBPUSD (yellow)

http://www.fxprimus.com/education/wp-content/uploads/2014/07/dmr-160714-2-600x150.png

Source: Bloomberg