Following a triumvirate of macro misses from AsiaPac (South Korea unemployment surged, Aussie confidence plunged, and Japanese inflation tumbled), the credit concerns running riot through the collateral underlying China's shadow banking system continue to crush Copper (and iron ore) prices. Copper is limit down in Shanghai at its lowest since July 2009 - these size moves have only occurred twice in history (Lehman and the US downgrade). Japanese stocks are ignoring any ramp efforts in USDJPY and US equity futures are fading qucikly with AUDJPY....
A near-term outlook for the dollar against the major foreign currencies.
A weekly technical outlook for the major currencies.
With iron-ore stockpiles at record highs in China amid the escalating cash-for-steel financing debacles, one can only imagine the squeeze that is about to occur on the banks of a nation that is almost entirely economically dependent on said iron-ore mining production... which made us think when we saw this sign "justifying" holding low cash amounts in an Aussie bank ATM...
A look at the price action among the major currencies for the week ahead.
New figures show China's credit bubble continues to grow. President Xi Jinping hasn't done nearly enough to arrest the bubble and needs to act fast.
There is a very good chance that the crisis that began in 2008 is actually not over by any stretch – it is merely moving from one place to the next. After all, the developments discussed below are a direct result of the reaction of the world's monetary authorities to the initial crisis. China's credit bubble and ZIRP in the US and Europe are all children of the crisis and have evidently sown the seeds for the next crisis. As we always stress, we expect that the next major crisis will eventually lead to a crisis of confidence in said monetary authorities. At some point, faith in central banks is bound to crumble and then we will really experience 'interesting times'.
A technical look at the currencies. The phase that has characterized the first few weeks of the year has ended and a new one has begun.
Once again the smell of NAPALM is in the air
USDJPY opened the evening under 102 with JPY holding its losses until aroun 1700ET when it broke back above the crucial level. S&P futures and USDJPY recoupled for a few hours but are now decoupling faster than the Seahawks and Broncos (S&P -1pt, USDJPY +30 pips). The catalyst for the disconnect (which Japan's Nikkei is also following) was weakness in Chinese data. Following Aussie PMI's lowest print in 5 months, China's Services PMI printed at its lowest on record and its biggest 3 month slide in 16 months. Japan's Nikkei 225 is now down 10% in 2014 and 7 of the last 8 days and 20Y JGB yields are testing 9-month lows.
Overview of the price action in the foreign exchange market.
The Supply demand fundamentals of the gold market remain sound with the flow of gold from West to East. COMEX gold stocks have fallen to new record lows (see chart) showing demand for physical bullion remains very robust. Indeed, the scale of the fall in COMEX gold stocks since 2007 and which accelerated in early April 2013 is important to note.
The positive momentum in equities slowed in Asian trading with losses seen on the Nikkei (-0.4%), and HSCEI , the SCHOMP unchanged and EM indices such as the Nifty (-
0.1%). In Australia, a disappointing December employment report saw a 23k fall in jobs for the month against consensus expectations of rise of 10k. The 10yr Australian government bond has rallied 5bp and the front end is outperforming as a number of investors expect the RBA to continue its easing bias over 2014. AUDUSD has sold off -1.1% to a three year low of 0.881. The ASX200 closed up 1.2% however, boosted by mining-giant Rio Tinto (+2%) who reported better than anticipated Q4 production. Amid recent fears of a Chinese growth deceleration, Rio Tinto reported record levels of production of iron-ore, coal and bauxite. In FX, USDJPY is finding further support in Asia, adding 0.1% to yesterday’s 0.38% gain to trade not too far from the 105 level. Which is also why the S&P futures are trading modestly lower: without a major breakout in the Yen carry, there can't be a sustained ramp in the US stock market which is driven entirely by the value of the Yen, which in turn is a reflection of the expectations of future BOJ easing.
All signs point to serious trouble for the Chinese economy. The best ways to play a China downturn: short-selling Australian banks, China property and the yuan.
Dolllar weakess is largely concentrated against euro and sterling and those handful of currencies that move in their orbits. The US dollar is firm against the dollar-bloc and yen and many emerging market currencies.