Forex Investment and Currency Trading

China’s sharp rise of its Sept currency reserves and credit supply signal that liquidity conditions will remain supportive for some time pushing asset prices higher. Bank loans rising by RMB516bn exceeded expectations by a wide margin indicating that credit conditions have remained extremely loose. The USD141bln rise in currency reserves suggests China will reallocate incoming reserves from USD into other currencies. A Bloomberg story suggests that the allocation of incoming reserves has seen 63% go into EUR and JPY. Rising currency reserves signal two things. First, USD selling pressure due to reallocation needs. Secondly, global bond yields will remain low as rising reserves signal surging global savings which tend to be channelled into Western debt markets. Low bond yields will then allow the equity and other risky asset rally gain additional momentum.

China’s trade balance release has fuelled hopes that the globe is undergoing a successful rebalancing and this hope will boost stock prices and redirect non-yielding USD based liquidity into yielding assets which will weaken the USD. The improvement of Chinese imports suggests that China’s domestic demand boosting policy has benefited its trading partners and may be interpreted that the global economy is successfully rebalancing. Needless to say that China’s strong trade data will mainly support currencies of countries with a strong trade relationship with China such as the AUD, KRW and the JPY.

Finally, China’s trade numbers provide universally good news for commodity and cyclical currencies. USDCAD’s break below 1.03 has opened downside potential to 1.00. However, Friday’s release of Canadian CPI represents a substantial event risk for the CAD as the BOC has repeatedly declared that CAD strength would be the main risk to its inflation projection. Core Canadian CPI was 1.6% in August and is expected to fall to 1.4% in September. An inflation undershoot below 1.4% will impose a BOC CAD weakening intervention risks. Option trades need to be aware of this risk, pricing implied volatility correctly.

The RBNZ announced that “it will be removing and consolidating some of the temporary emerging liquidity facilities put in place during the financial crisis in 2008.”. The mopping up liquidity approach will support the NZD.