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Forex Commentary EUR/USD,GBP/USD April 2, 2012

Hi guys. There hasnt been much that has changed since the weekly wrap although we did have a gap up this morning due to some Manufacturing PMI data released by China. The AUD/USD had the biggest jump but the EUR/USD and GBP/USD has a nice pop too. The funny thing is as I was going through my news sources this morning I could see why the gap was closed rather quickly. Mainly because the difference between Chinese sources for data and HSBC are totally different. The Chinese data shows expansion while the HSBC shows contraction. Who do you believe? To be honest I think that should be up to the individual. Each has their own reasons why they would manipulate the data in their favor. This comes from Zero Hedge this morning.

Back in February we were quite amused by conflicting internal and external reports of manufacturing growth in China, which according to the HSBC Markit Manufacturing PMI index had contracted for a 4th consecutive month even as the official Chinese PMI data showed 3 consecutive expansions. It just happened again, only this time the spread between the two indices has jumped to the second highest ever, with the official PMI index surging to 53.1, an expansionary number, an eleven month high while according to HSBC it slid to 48.3, indicative of contraction, and paradoxically indicating that in “the first quarter as a whole, the index averaged its lowest reading since Q1 2009.” In other words, the Schrödinger paradox – where the economy was doing better and worse at the same time – which was experienced for the past three months in the US (and is now finished with the economy rolling over), has shifted to Shanghai, where it is now the PBOC’s turn to baffle all with bullshit. Why? One simple reason: despite what everyone believes, China still has residual and quite strong pockets of inflation. So while the world may be expecting an RRR, or even interest rate, cut any second now (just as China surprised everyone literally house before the November the global FX swap line expansion by the Fed in November 2011), the PBOC is just not sure it can afford the spike in inflation, or even perception thereof.

This also explains why while HSBC, being a member of the banking cartel would love nothing more than more easing from PBOC, China is far more more cautious about further easing, especially if the Fed does go ahead with more QE anyway, the bulk of which China would import as excess inflation anyway. The last time we had a record spread between HSBC and China PMI, Chinese CPI soared from -2% to over 6%. China is now at 3%, just as the index spread is the second highest ever. If we are to assume that Chinese easing will follow the March 2009 episode, and thus assume a trough Chinese inflation of 3.2%, one can see that the 12% implied inflation at the end of the current easing episode is why the PBOC will be far, far more reluctant to engage in the same easing policies as the Markit group of banks would wish for it to.

So to put it in more simple terms the Chinese want everyone to believe they can be the ones to pull the world back from the mess created by the big banks and Central Planners while the way I see it is the hard landing is more likely. Considering that inflation in China has already brought on pockets of civil unrest that they squashed rather quickly the last thing the communists can afford is inflation worsening and more unrest with a regime change coming within the next year. The fact is while the Fed was printing and now the ECB doing the same the Chinese were doing their own back door printing all along and the civil unrest shows it. The thing to remember is that the west only hears about a small percentage of these so the chances are the unrest goes well beyond what we know. Everyone is playing the same game now and it seems more like a race to the bottom to me. To say I know how things will turn out would be crazy on my part but I can say its going to get interesting in the not so far off future.

Happy trading guys. Im still looking for the shorts I mentioned in the weekly wrap.



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  1. Nicholas Kellagher
    Nicholas Kellagher April 02, 06:29

    Hi Chad
    dont really follow China too much
    guess its closer to you
    interesting analysis
    does anyone really know whats happening in China
    I heard that China is planning to float its currency?
    how would that play out?

    Reply to this comment
  2. Chad
    Chad April 02, 06:45

    Hi Nicholas

    To be fair I doubt anybody really knows whats going on in China. There are plenty of fund managers that visit there to get their analysis straight and those guys would have the best information. However I would bet even they get “all is well” scenario too.

    I dont follow Chinese data too much either but I do recommend anybody who trades the AUD/USD or AUD/JPY that they keep an eye on Chinese data or they could easily get caught by a release or tape bomb. Even Forex Factory only recently started adding Chinese data to their scheduled releases mainly because they are supposedly gonna save the world economies LOL Plus it is crucial for the Aussie since their economies are so closely intertwined right now.

    I have my doubts they will float their currency any time soon. If they did it would be at a time when it would have minimal impact to the exchange rate vs the USD. Which may be sooner than I expect but in my view would be once their hard landing has began.

    Nice hearing from ya buddy


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