Ashraf Laidi on China's Currency & Eurozone to AlArabiya - April 14, 2012
Apr 15, 2012 3:22
Ashraf tells AlArabiya that China's decision to widen its currency fluctuation band against the USD to 1.0% is another signal that the Chinese yuan (RMB) will be heading lower or remain flat at best into the end of the year. Ashraf has shown one day before today's announcement how CNY (green line) was immobile during the 2008 financial crisis. Today, the currency seems to be entering a new phase of immobility, but this time, justified by weakening data (GDP, CPI and trade balance) . As the currency remains unchanged (or declines) and GDP growth consolidates to 7.5% level, this raises serious questions about Chinese overall commodity demand. Copper (China's hot commodity) is already 20% below last year's highs. If commodity traders no longer find solace from the Fed asset purchases, then the short-lived declines we saw recently in metals and energy may be here to stay... especially when combined that sluggish Chinese demand and a weaker CNY.
Spanish government bonds are now the latest victim of bond traders typical one-country assault amid speculation that Spain will be the 4th recipient of a Eurozone bailout. At a time of deepening recession, Spanish authorities have selected education and health sectors for 10 billion in budget cuts. Cuts in these sectors have yet to prove successful or sustainable the he Eurozone. Little surprise that the biggest yield gainers are of nations, which are not yet bailed out Spain and Italy. The combination of protracted gains in Spanish government bond yields and rebounding volatilities (EUR 1mth & VIX) would be needed to break the euros floor of $1.2900. The possible fundamental culprits for such occurrence:
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It does not matter the Bank of Japan will raise rates to a 30-year high. It also unlikely to cause a violent unwiding of the carry trade as was the case in August 2024? Why? First of all, Friday's 25-bp hike in the overnight rate to 0.75% is widely anticipated and will not be a surprise as in August 2024. Also remember, we had a rate hike in January, which was harmless in scale and in anticipation. Secondly, stock markets are well below their highs, meaning they're not at their peaks as was the case in August 2024, when they were vulnerable to any pricking from the Japanese needle. BoJ Governor Ueda, shall temper market fears, by indicating that the new 0.75% rate is well below the neutral rate, which is around 1.0%. This means 0.75% is not at all hawkish. If anything, it remains too low. Once Ueda asserts this point, while assuring no rush in future rate hikes --markets are likely to take it in stride. TIMINGS: BoJ announcements are usually between 3-4 am GMT, followed by the important press conference around 4.5 hrs later.
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