Heavy Trading in the Dollar Starts Off the Week in Currencies

The US dollar is trading heavier against most of the major and emerging market currencies. The euro and sterling remain within the ranges seen prior to the weekend while dollar slipped to JPY107 in a Tokyo-less Asian program. 

Unanticipated strong Chinese imports helped underpin the actual Australian dollar. Most Oriental equities followed the US reduce, though the recovery in Europe may have helped lift Indian shares in late dealing. European shares gapped lower but were able to recover by mid-morning. Bond markets were firmer in Asian countries and weaker in European countries, though UK gilts are significant exception, slipping to new lows (since June The year 2013) below 2.20%.

Neither French nor Finnish bonds show much response to the pre-weekend announcement by S&P.  It took Finland’s AAA standing away and cut France’s perspective to negative from stable.  France’s 10-year is flat at One.25%, and Finland’s yield is up not even half a basis point.  Greece’s government survived the vote of confidence just before the weekend, but this has not removed the pressure upon Greek bonds, where the 10-year deliver is up 8 bp to a different three-month high near 6.55%.  

The main news today appears to be about China.  First, it reported strong rise in imports and exports, along with a substantial trade surplus that a quarter smaller than expected.  Exports flower 15.3% in September from a year ago.  This follows the 9.4% increase in August, as well as expectations for a 12.0% increase.  This is the strongest since Feb 2013, when there was still much suspicion of Chinese language companies using exaggerated exports to cover capital flows.  Imports unexpected rose 7% in September.  The consensus was for a 2% decline after a 2.4% decline in July.  Details were sketchy, but electronic imports appeared strong while commodity imports and autos had been soft. 

Second, the ECB indicated that it had been considering adding Chinese yuan to its reserves.  We have been skeptical from the talk of the internationalization of the yuan.  In the end recognize its increased make use of, we find much of the reports grossly exaggerated.  For example, Hong Kong is part of China, as the Hong Kong people understand full well, yet when the trade is conducted in yuan, many observers count that included in the internationalization of the yuan, but is it truly?  The network of exchange lines it has established is actually interesting, but they have not been utilized.  It is as if it is not valued the logic of the buck swap lines and the part of dollar funding within this (we are told) G-Zero world. 

Yet, main banks holding yuan as reserves is indeed the internationalization of the yuan.  Nevertheless, we caution here as well that the exaggerations distort the real advancements.  First, there are simply insufficient yuan assets, which are what supplies are kept in, available for the yuan to be a major currency.  Second, a small amount of yuan in reserves is consistent with the broad pattern of some diversification into "other currencies".  Third, it is not a zero-sum game.  As reserve holdings overall increase, the yuan can be covered without the sale of another currency.  This also means that an increase in the yuan may come at the expensive of other currencies, but not always the dollar.  In the ECB’s situation, maybe the yen or sterling, for example. 

In any event, recall that China is working to establish a few financial centers, such as London and Frankfurt, to clear yuan deals.  The UK recently indicated it’ll sell its first yuan bond for reserves, and the ECB’s intend to explore the issue seems broadly consistent with this.  It is not worrying, nor does it signal the actual imminent demise of the dollar.  

Brent oil continues to trade heavily.  The Saudis and the Iranians have reduce prices for Asia.  Essential oil from Africa, like Nigeria, which was once one of the top five suppliers to the US, has diverted supplies to Asia when confronted with weakening US imports.  Kuwaiti officials indicated over the weekend that OPEC was not likely to agree to cut output to support prices at next month’s OPEC meeting.  Note that OPEC’s agreement is perfect for 30 mln barrels a day.  Estimates suggest it produced Thirty.474 mln bpd.  Kuwait’s oil minister was cited suggesting that $76 a gun barrel may be the new floor with regard to prices.

Dollar Heavier to Start Week is republished with permission from Marc to Market