NEWS / Foreign Exchange

Yen Finally Finds A Bid As China??™s GDP Exceeds 11%

Talking Points

??? Japanese Yen: Bid all night on China GDP and strong Tertiary results
??? Euro: weighed by EURJPY selling
??? British Pound: Finds buyers at 2.0000
??? US Dollar: Jobless claims key to soft landing view

Yen Finally Finds A Bid As China??™s GDP Exceeds 11%

FX trading tonight was dominated by massive unwinding of carry trades as the Shanghai stock market plunged on fears that PBOC would once again hike rates as a result of a stronger that expected Chinese GDP report. The release of the GDP numbers was delayed until after the equity market close, but trader??™s concerns were well founded as Chinese GDP printed at 11.1% well above the 10.4% forecast while March CPI expanded at 3.3% annual rate. With Chinese growth showing no signs of cooling, chances of another 27bp rate hike by the PBOC increased markedly, triggering sell-offs in Asian equity markets. The decline in stocks in turn created liquidation of long USDJPY positions as risk aversion once again returned to the FX markets. Yen??™s rise was also aided by much better than expected Tertiary Activity Index which printed at 1.0% vs. -0.4% expected. With more than 57% of Japanese GDP now contingent on services (up from 50% less than a decade ago) the strong performance of this sector bodes well for the overall Japanese economic growth. The news even spurred rumors of a possible BOJ hike in May, although given the bank traditional reluctance to initiate policy changes ahead of parliamentary elections we continue to think that such a move would be unlikely.

The euro meanwhile was caught in the crosscurrents of carry trade liquidation as EURJPY plunged more than 100 points dragging EURUSD down with it. The currency also received no help from the economic data, as both German PPI and Italian Industrial Orders disappointed. The PPI numbers came in a bit softer than expected at 2.5% vs. 2.7%, but perhaps more troubling for euro bulls the Italian Industrial orders missed by a wide margin, declining by -2.5% vs. forecasts of 2.0% rise. Granted Italian manufacturing is the least important data set amongst the Eurozone??™s Big Three, but its has knack for being the first to signal slowdowns in demand for the region a whole. Along with the weak Industrial Production numbers last week, this is the second consecutive disappointing release from the Italian manufacturing sector this month. As long as German production continues to remain robust, this data serves merely as noise for the FX market. However, if the weakness in the Italian manufacturing is an early indication of the problems caused by euro??™s high exchange rate that affects all European producers, the ECB would very likely delay the next 25bp rate hike to June rather May meeting and that the realization of that fact could temper the currency??™s progress in the near term.

Finally, today??™s US data calendar contains weekly jobless claims, LEI and Philly Fed. Weekly jobless claims are generally a minor event but this week??™s release may take on a much stronger significance. Last week the report saw a sharp increase to 342K from 323K the week prior. For now the market considers that spike in claims to be an aberration and looks for a return to 325K. However, should the data surprise to the upside once again it could weigh very heavy on the greenback as all of the dollar bear concerns about the contraction in housing leading to a loss of jobs and a possible US slowdown will once again rise to the surface.