FX Daily: US headed in the right direction but with little gas behind the pedal

9th June 2014

  • The US 410K pension system will be cash negative in less than 2 years. This could prove disruptive for asset managers and result in equity sales to make up the shortfall. (The FT)
  • Fears that economic sanctions from the West will limit Russian companies access to dollar funding has seen an increased demand for renmimbi for trade purposes. Russian companies are looking to set up accounts to trade Renmimbi, Hong Kong Dollars and Dingapore Dollars. (FT)
  • With Asian borrowers tapping international bond markets to the tune of more than US $100 bn so far in 2014, banks that rely on lending are starting to suffer. (The FT)
  • BoJ Governor Kuroda said that the BoJ ended its previous easing policy too early to overcome deflation and that its commitment then to anchoring inflation was too weak, indicating that the bank will continue with the current aggressive easing until stable 2% inflation is firmly established. (MNI Market News)
  • China’s Premier Li said policy needs to be more targeted, precision-based and that the country needs to get creative in policy making. Li relayed concerns that policy isn’t being carried out. (MNI Market News)
  • The PBoC has been arguing against an interest rate cut to support flagging economy in high-level government discussions. The official says conditions are theoretically ripe for a rate cut but it risks worsening other problems in the economy. (WSJ)
  • China’s State Council has issued a circular requiring government ministries and local governments to review the implementation of economic policies unveiled since last year, worried that many policies are not being carried out and haven’t yet had a good impact. (People’s Daily)
  • China’s May Trade Balance was the largest since January 2009 at $35.92billion in May, beating estimates of $22.6B. The strong surplus was the result of a -1.6% annual fall in imports and 7.0% annual gain in exports.
  • Japan Q1 GDP was revised higher to 1.6% quarter on quarter from 1.5% and despite expectations for a downgrade to 1.4%. The upward revision was driven up a sharp increase in business spending at 7.6% on the quarter from 4.9% previous.

Friday’s US payrolls report was bland. Yes it was the fourth consecutive month of 200,000 plus print but after a mere 84,000 jobs created in December and 144,000 in January, the US isn’t experienced the rebound in employment growth you would expect. The unemployment rate remained unchanged at 6.3% and pay growth was a begin 2.1% annual. The report is reflective of the larger US economy – heading in the right direction but without much gas at the pedal. The brash and unashamedly showy US economy is now a more modest and retiring version of itself. In this new version of the US, the new neutral for the Fed Funds rate is around the 2% level. This explains the underperformance of the US 10 year yields as traders adjust their expectations about the termination rate for the Fed Funds rate. The US 10 year is bumping along the bottom of a new lower range, with the mid-point around 3%.

One reason for the lacklustre reaction in the dollar Friday was the participation rate, which remains stuck at a 46 year low. Some analysts offer up the aging population as an easy excuse for the fall-off however the co-ordination between the sharp drop in participation and the 2008 crisis seems too much of a coincidence. According to statistics by the FT, the changing age structure of the US should have decreased overall participation by 0.2-0.3% a year from 2008. That means abstracting from the Great Recession the participation rate should have been 64.3%, it is currently 62.8%. An aging population also doesn’t account for the sharp increase in social security disability claimants or the rise in student enrolment. In fact, the biggest decline in participation during the crisis came from the youngest age group, not the oldest. The fast pace at which the long-term unemployed are now finding work as the economy recovers also suggest the drop-off in participation is too a large part cyclical and represents spare capacity in the US economy. We continue to expect the dollar to underperform in the short to medium term as moderate growth and the large degree of spare capacity means the Fed won’t bring forward rate hikes. This suggests the dollar will remain subdued until we finally get a better steer on the timeframe between the end of tapering and the first rate hike. This supports our view that sterling-dollar will break $1.70 level before year end, meaning sterling buyers should take advantage of current levels.

China reported their largest trade surplus since January 2009 at $35.92billion in May. The reading surpassed estimates and was the result of both stronger export growth and a fall-off in imports. The positive surprise for the economy is in line with a plethora of better prints out of the world’s third largest economy recently. The turnaround comes after China implemented a list of targeted stimulus measures which policymakers insist do not amount to broad easing. These data suggest otherwise. The PBoC also set the yuan fixing sharply higher this morning, in a statement to the markets that yuan volatility is two-way and that the currency is moving towards a freely floating rate and one that is fundamentally determined. We warn investors against complacency when it comes to the yuan as the PBoC continue to try to scare away market speculators.