The media is hot with news of a Chinese recovery today and that’s convincing some investors to sell the Japanese yen on prospects for increased risk appetite. The dollar rose to ¥91.57 today while the euro today buys ¥117.57. With a weekend G7 meeting on the agenda investors are wondering whether U.S. Treasury Secretary, Timothy Geithner’s overtures to finance ministers and central bankers will make for a more successful appearance than his debut to both Congress and the American public earlier this week.
Apparently Mr. Geithner will push cohorts to take complementary measures and institute policies that will address the tough challenges posed by the macroeconomic environment and frailty of the financial sector. Here’s the strange thing though. Today we heard from the Europeans that growth in the final quarter of 2008 fell by 1.5% - worse than anticipated with the engines of France and Germany, the heart of Europe, slumping by the most in twenty years. That means that the fallout from the epicenter of this quake was greater abroad than in the domestic U.S. economy where output shrank by just 1%.
We can’t help but poke fun at the ECB, which was raising rates just last July precisely because they felt that they were insulated from the U.S. banking sector contagion as they focused on inflation instead. Now the Eurozone is expected to contract by 2% this year and grow by 0.6% in 2010. Again on both counts they will be eclipsed by American growth, at least on current projections.
In response to today’s date the euro is weaker at $1.2848 after putting in a $1.2720 low yesterday. There is also talk in the market about a large strangle expiring today in the euro/$ pairing, which could make for interesting trading if the euro starts to sink today. Market talk yesterday centered on a double-knockout option in which a trader appears to have sold the $1.27-$1.37 strangle. If either strike is touched, ahead of expiration the combination expires worthless, which inspires the seller to support the euro through expiration. It appears that investors tried to lean on the lower strike yesterday to inflict damage on the strategy. If $1.2700 does give way today, watch out below.
The Chinese too felt that they were largely immune from U.S. financial woes. It is true that domestic banks didn’t dabble in the same toxic debts that the Norwegian town of Narvik did. But you can’t escape the fact that China’s core strength is efficiently providing for the rest of the world. After years of 9%-plus growth, the Chinese economy has leapt up the ranking tables and stands at the world’s third largest economy. But when growth sank alongside global output, millions of workers quit the cities and returned to the countryside. Analysts suggested that a sub-7% growth rate for China might actually be equivalent to contraction.
Thanks largely to a $585 billion government stimulus package first quarter growth of 6.3% might be followed by a second quarter growth rate of 6.6% according to one local analyst at an American broker. There have been undeniable signs of life in credit growth across corporations and households since October 2008 and that is possibly due to the fact that government and central bank stimulus does trickle through the banking system. The nation’s banking system is not constrained in the same way that those of Europe and America are by toxic debt hampering loan decisions.
China’s spending on construction, machinery and infrastructure might be creating growth today. But you can’t export a highway to Australia nor sell an apartment complex to Tokyo. Don’t get us wrong, it’s great to hear some good news on the Chinese economy, but to expect its sustenance without ongoing fiscal and spending stimulus is naïve. Coordinated measures from other economies to kick-start growth are a pre-requisite for a return to riches.
Another item allegedly on the G7 weekend agenda will be sterling’s ill-health. Apparently its ailments are the cause of concern from other European ministers. We can only imagine that the Brits are quite happy with a weak pound in light of the state of the economy. Who needs an uphill struggle in the face of the worst slump since the Second World War? We think Mr. Brown will thank his chorts for their collective concern and refer them to Britain’s terrible record of defending its currency and let sleeping dogs lie.
