In its semi-annual report to Congress, the Treasury Department once again failed to officially label China (or any country for that matter) a currency manipulator. No surprise there. While it’s self-evident that China manipulates the RMB (via the peg with the US Dollar), the political implications of such a label prevent it from being used except in the most extreme cases. Nonetheless, there is mounting pressure on China, both domestic and international, to “adjust” the peg and allow the Yuan to move closer to its fundamental value.

Most of the international pressure has been soft, coming in the form of roundabout pleas for China to allow the Yuan to float “for the sake of global stability.” Said one US Senator weakly, “I hope that with strong leadership from the United States, the G-20 nations and our international institutions will undertake what has been missing — a focused, sustained and meaningful multilateral engagement to address currency manipulation and current imbalances.” At the same time, some of this rhetoric has recently been translated into action. Last month, the Obama Administration enacted a 35% tariff on Chinese tire products. Other countries have also begun to raise concerns about Chinese dumping, and bringing their cases to the WTO for good measure.

Many of these countries are in fact suffering more than the US. Since the Yuan is effectively pegged to the Dollar, the decline of the latter has been mirrored by the former. Since many other currencies of developing countries are also fixed, this leaves only a handful to absorb the shock. For example, the Euro and Yen have both risen about 15% against the RMB over the last year, in line with their appreciation against the Dollar. The handful of floating currencies in the region, such as the Korean Won, Indian Rupee, Malaysian Ringhit, etc. have also faced strong upward pressure. For them, it is not so much the weak Dollar that they fear so much as the weak RMB, since China is a direct competitor to all of them.

More importantly, there are now voices within China’s ruling Communist party that have also begun to press for a stronger Yuan. The Nationalist camp, for example, is pressing for China to make the Yuan a more prominent currency on the international trade scene. While such doesn’t inherently require a floating currency (in fact, all of the trade/swap agreements involving Yuan are based on fixed exchange rates), a loosening of capital controls and liberalizing of financial markets would probably bring about a stronger Yuan.

The other group pushing for a stronger Yuan is doing so on more fundamental, economic grounds. Just-released 2009 Q2 GDP data showed prelimenary growth estimates of a whopping 8.9%! Not bad, especially when you consider that the rest of the world remains mired in recession. Chinese economists largely ignore the political implications of the notion that this growth probably came at the expense of the rest of the world, and focus instead on the economc implications.

First is that the economy remains hopeless dependent on exports to drive growth, which can only be remedid through a stronger Yuan. Second, it heralds the coming of inflation. Many foreigners continue to pour “hot money” into Chinese asset markets hoping to reap the upside from both asset and currency appreciation. In response, “Analysts say China could let the yuan appreciate to help restrain inflation, since a stronger yuan would reduce the cost of imports. But some caution that Beijing tried a similar strategy in early 2008, but didn’t achieve great success in containing inflation or stemming the inflows.”

While analysts don’t expect the Bank of China to allow the RMB to rise until after the Chinese New Year in January, investors are pricing in incremental appreciation every month beginning with the next. In fact, futures prices already reflect the expectation that the RMB will rise 3% over the next twelve-months. My bet is that this will be kicked off by another one-off appreciation, in the same vein as July 2005. Now as was the case then, China needs to make up for lost time.

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Those hoping for a quick economic turnaround in the U.S. economy were disappointed today as the economic data from the U.S. failed to match its market expectations. However, the surprise of poor performing Durable Goods Orders and New Home Sales wasn’t enough to stop the trend of a weakening U.S. Dollar.

Core Durable Goods Orders had 0% growth for the month of August. They were forecasted to rise by 0.9%. Also Durable Goods Orders dropped by 2.4%, falling short of the 0.3% expected rise. This was the largest reduction of durable goods since the January contraction of 7.8%. Concurrently, new home sales rose for the fifth month in a row, but the rise was only 429K, far less than the 442K that was expected.

However, the disappointing data releases do not appear to be strong enough to convince forex traders that the U.S. economy’s recovery is stalling. This is shown by the continued depreciation of the dollar against the euro. Traders assume an economic recovery will be good for the euro.

Immediately following the data release, traders sold the EUR/USD, but in the later minutes after the market had a chance to fully absorb the data, the pair reversed its losses and proceeded on its upward trend. The EUR/USD could continue its month long bullish trend into the month of October.

This disheartening news tells us that the road to economic recover will not be V-shaped, but rather gradually, and perhaps slower then expected. But it also tells us that the economic data has hit a trough, and may only have room to grow.

The Swiss National Bank left its three month libor target rate without change in line with market forecasts at 0.25%. The statement from the Central Bank outlines their commitment to supplying liquidity and safeguarding the Swiss franc versus the euro.

It seems that after the positive retail numbers the SNB has revised its GDP growth estimates, and now expect Switzerland’s economy to fall between 1.5% and 2%. Although it may not seem like a positive it is because of their earlier forecast of a fall between 2.5% and 3%. Rising unemployment and a deepening recession might convince the Swiss National Bank to return to its previous estimate.

For more Swiss and International Economic data visit FXEconostats

Britain Expected to Leave Recession by End of Year

The Office for National Statistics (ONS) said today that Britain will soon exit the deep recession and join a growing list of economies that have returned to positive growth.

“Today’s data offers further indications that we are likely to see growth in the third quarter” and an end to Britain’s deep recession, said Charles Davis, an economist at Independent Consultants, the Centre for Economics and Business Research. More

IMF Increases 2010 Global Growth Forecast

The International Monetary Fund (IMF) has increased its forecast for global growth for next year to about 3 percent from 2.5 percent.

“The recovery is stronger than initially forecast,” Portugal, a former deputy finance minister in Brazil, told journalists on the sidelines of a business seminar. More

Japan’s Consumer Prices Fall for 6th Straight Month

Core consumer prices in Japan dropped another 2.4 percent in August when compared to the same month one year ago, marking the sixth straight month of declines. The decline was due mostly to lower gasoline and energy prices. More

Oil Lower in European Trading

US crude futures dropped 17 cents to $66.57 a barrel by midday in Europe, while North Sea Brent crude futures fell 11 cents to $65.43. Expectations of weaker demand are expected to be reinforced by weekly inventory data from the United States due later this week.

“Crude will continue to move according to the stock markets and inversely to the dollar, which will remain weak,” said Tony Nunan, risk manager at Mitsubishi Corp in Tokyo. More

Trichet summed it up yesterday, ‘In the present situation it is extremely important that we can have in the framework at the level of global finance and the global economy a strong dollar……’ there you have it, the end of this long USD bear run. He convinced me, if the ECB says so, it’s a done deal! ‘The solidity of the dollar is very important’. Wait one moment, perhaps he was talking about the AUD, CAD or NZD? What ever one he was referring to, like other CBankers of late, they are trying to weaken their own currencies with verbal intervention. Canada’s Governor Carney is losing his battle!

The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies in a ‘whippy’ trading range.

We have little to chew on again in North America today as we wait for the granddaddy of employment reports this Friday. This morning, do not be surprised if we are treated to US house prices fallen at a slower pace and consumer confidence improving, further signs that the recession is abating. It seems that investors remain punch drunk from the G20 last week. The masses have been very quick in buying equities. Their fear of missing the next move higher is obviously too great. It’s not about global fundamentals, it’s about liquidity and the market is awash with it! Other events this week could shape our short term goals and rain on the party. Tomorrow’s unlimited provision of term liquidity by the ECB at the refi-rate and Friday’s US payroll numbers. The one way directional play of equities, commodities, treasuries and the USD will end in tears sooner than we think!

The USD$ is currently higher against the EUR -0.19%, GBP -0.13%, CHF -0.26% and JPY -0.10%. The commodity currencies are stronger this morning, CAD +0.38% and AUD +0.31%. Governor Carney took to the stage yesterday after a volatile weekend for the loonie. He continues to try and talk down the CAD’s strength. He said that the Canadian economy is recovering from its 1st recession in 17-years, however, warns that the ‘persistent strength’ in the currency could offset the improvement in growth and keep inflation below its target (2%). Again he reiterated that he would keep O/N rates at historical lows (+0.25%) until June of next year unless ‘the inflation out look changes dramatically’. After last weeks abysmal retail sales number (-0.6% vs. +0.8%), that will not to be an issue in the medium term! He remains optimistic and even commented that the economy may grow faster in the 2nd-half of this year than their ‘twice’ revised predictions. The pace of growth could be attributed to a gain in auto productions and a faster drawdown of inventories. Year-to-date the currency has appreciated +12% vs. the -18% decline that was recorded last year. The consistently weaker USD has made Canadian products uncompetitive. This is a global story, not an isolated case. On the flip side Canada has ‘stuff’ that the rest of the world requires and that commodities. Carney said that the Cbank is ‘not out of bullets in terms of implementing policy’, but, they are not also ‘trigger-happy’. For the time being the loonie remains consistently range bound influenced by commodity and global equities. On deeper USD pull-backs, speculators are happy to sell the domestic currency.

The AUD dollar rose for a 3rd-day down-under and is now approaching its strongest level in over a year vs. the USD. Traders continue to add to their bets that the RBA will need to raise rates by year end. Fundamental data remains somewhat stronger than most other major economies. Their budget deficit was -$23.7b for the year ending in June, less than the previous month’s estimates of -$28b. With global bourses advancing, investors risk appetite desires higher-yielding asset classes (0.8726).

Crude is higher in the O/N session ($66.94 up +10c). There were a number of factors yesterday that lent support to oil. Firstly, after last weeks aggressive retreat (-8%) the market was in need of some sort of correction. Secondly, crude managed to follow stocks higher on the back of proposed mergers in the tech and health industry. Finally, the threat of imposing greater sanction on Iran because of its nuclear program has heightened geo-political issues. Technically oil prices are inflated, they are not supported by market fundamentals, but geo-politics will always keep the black-stuffs prices artificially high. Do not expect the situation to change anytime soon. Last week, the surprise jump in US crude and product stocks had raised doubts that prices may have run ahead of demand fundamentals. But because of Iran, the landscape has changed again. The EIA report revealed an unexpected increase in stockpiles at some refineries idled for seasonal maintenance. Inventories climbed +2.86m barrels to +335.6m last week vs. the bullish expectation of a decline of -1.4m barrels. The fundamental gain in inventories was the largest in nearly 2-months and pushed stockpiles +9.1% above the 5-year average for the week. Refineries are operating at +85.6% of capacity, w/w, and are down -1.4% from the previous week. Ongoing proof of demand destruction is seen in the US’s fuel consumption numbers which have dropped -3.3% to +18.5m barrels a day (the lowest in 3-months). Even more of an eye opener was gas stocks whose inventories rose +5.41m barrels to +213.1m (the biggest increase in 9-months and has left stocks +6.5% above the 5-year average). The market was anticipating only a +500k gain! We could not leave the inventory for distillates out, they rose +2.96m barrels to +170.8m, and the highest level in 26-years! So we may have to forget fundamentals in the short term again and see politically what develops for guidance.
Gold prices have stayed close to home after the initial surge in the value of the greenback. However, speculators see an opportunity for the yellow metal to gain with the dollar’s renewed pressure and heightened geo-political tension in the Middle East boosting the demand for the ‘yellow metal’ as an alternative investment ($994).

The Nikkei closed at 10,100 up +91. The DAX index in Europe was at 5,709 down -27; the FTSE (UK) currently is 5,148 down -17. The early call for the open of key US indices is lower. The 10-year bonds eased 4bp yesterday (3.29%) and are little changed in the O/N session. Treasury prices continue to maintain their bid as investors speculate that the Fed will signal that interest rates will remain at record-low levels for the ‘foreseeable future’ as inflation remains subdued. Capital markets fear that the US unemployment rate may chose to grind higher in Sept. The report is out this Friday and at the moment any pull backs are coveted. Investors are moving down the curve, selling the front end in search of yield.

The US dollar edged higher against most of its major rivals in early New York trading on Tuesday. The greenback stayed at 2-week high against the Swiss franc, 15-day high versus the euro and a 4-day high against the Japanese yen.

In economic news, the S&P/Case-Shiller 20-City Composite Home Price Index fell at an annual rate of 13.3 percent in July compared to the 15.4 percent drop reported for June. Economists had expected the index to be down 14.2 percent year-over-year.

At the same time, the Conference Board said its consumer confidence index slipped to 53.1 in September from a revised 54.5 in August. Economists had been expecting the index to increase to 57.0 from the 54.1 originally reported for the previous month.

Dallas Federal Reserve President Richard Fisher said today that the country should exercise cautious optimism in the coming months as the economy recovers, as the housing industry is “still on life support.”

The dollar advanced more than 2.3 percent to a 4-day high of 90.36 against the Japanese yen by 10:00 am ET from yesterday’s fresh 8-month low of 88.25. The next upside target for the dollar-yen pair is likely to be seen around the 91.0 level. The pair ended Monday’s trading higher at 89.65.
The yen traded lower today after the Cabinet Office said that consumer prices in Japan were down 2.2 percent on year in August,, further triggering fears of deflation. The result matched forecasts exactly following the 2.2 percent annual fall in July. On a monthly basis, inflation was up 0.3 percent.

Core CPI, which strips out volatile prices for fresh food, was down an annual 2.4 percent in August – again matching the forecast after the 2.2 percent annual contraction in the previous month. Minus fresh food and energy, inflation was down 0.9 percent on year.

Against the European currency, the greenback climbed to a 15-day high of 1.4529 by 10:00 am ET. This may be compared to yesterday’s close of 1.4623. The euro-pound pair is presently worth 1.4544 with 1.447 seen as the next target level.

Eurozone economic sentiment rose to 82.8 in September, up from a revised reading of 80.8 in August and the expected level of 82.5, a monthly survey from the European Commission said today. However, the indicator stood well below its long-term average.

The consumer confidence index climbed to minus 19 from minus 22 in the previous month. At the same time, industrial sentiment improved to minus 24 from minus 25 and confidence in services moved up to minus 9 from minus 11.

Extending yesterday’s uptrend, the greenback jumped to a 2-week high of 1.0408 against the Swiss franc by 8:40 am ET. The dollar-franc pair that closed Monday’s deals at 1.0328 is presently worth 1.0395. On the upside, the greenback may find target around the 1.043 level.

Private consumption in Switzerland is likely to weaken in the coming months, the UBS consumption indicator suggested today.

The consumption indicator fell to 0.66 in August from 0.75 recorded in July. The indicator thus continued the downward trend that began a year ago. The UBS consumption indicator has now registered below its long-term average of 1.50 for eleven months now.
The dollar rebounded after hitting a 4-day low against the pound in early New York trading today. The greenback drifted higher to 1.5914 against the pound by 9:50 am ET from 1.5992 hit 2 hours ago. The cable is currently quoted at 1.593.

The latest report from Office for National Statistics showed that the UK economy contracted 0.6% sequentially in the second quarter. The second quarter decline was revised up from a 0.7% fall due to upward revisions to construction output.

On a yearly basis, gross domestic product dropped 5.5% in the second quarter, unchanged from the previous estimate. Annual decline was the biggest since records began in 1955.

FRANKFURT (Reuters) – European Central Bank President Jean-Claude Trichet said U.S. commitment to a strong dollar is important in keeping currency markets and the global economy stable.

Trichet also told Italy’s Corriere della Serra newspaper that he welcomed a reference in the Group of 20 summit communique that a sense of normalcy should not lead to complacency.

“I consider very important for the stability of the exchange rates and the prosperity of the global economy that (U.S. Federal Reserve) Chairman Ben Bernanke, Treasury Secretary Tim Geithner and President (Barack) Obama underline ‘that a strong dollar is in the interest of the US’,” he said, according to an interview transcript published on the ECB’s Web site on Sunday. “I trust that it is not only true but that it is also very important for the global economic stability.”

(Reporting by Krista Hughes)

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