Chinese trade data released earlier Wednesday showed a wider-than-expected surplus in January, serving to underpin commodity currencies, with the Aussie rising to the highest levels since mid-January while the Canadian dollar edged back to last Friday’s highs.
There were concerns that the data may be skewed due to the Chinese Lunar New Year holiday, but that did not prevent global investors from furtively going back into these currencies.
China’s headline trade surplus came in at $31.86 billion vs. analyst’s median of $23.5 billion.
January exports were up 10.6% y/y versus 1.6% expected and January imports were up 10.0% versus 4.8% expected.
The upbeat export reading “could have been boosted by a rush of shipments ahead of the Chinese New Year holiday,” which began January 31 versus February 10 in 2013, said Barclays strategists in a research note.
“However, it contrasts with the weak headline export growth reported by Korean and Taiwan caused by the holidays and weather,” they said.
The trade data overall suggests “that the underlying strength of Chinese exports is probably better than we expected,” Barclays said.
While wary of the distortion of the New Year holiday, the strategists also noted that “stronger-than expected improvement in global confidence and industrial activity” could pose upside risks to their Chinese exports outlook (9.3% y-o-y in 2013, versus 7.9% in 2013).
On the FX front, analysts remained cautious about the gains seen in the Aussie and Canadian dollars and warned that these gains may be temporary.
Aussie was trading at $0.9030 Wednesday afternoon, in the middle of the day’s $0.9007 to $0.9067 range.
The earlier peak was the highest level seen since January 13, when the pair topped out around $0.9086.
A clear-cut break above the mid January highs (also Dec 12, 2013 breakdown highs at $0.9082) would pave the way for a move back to the December 10 peaks at $0.9167, or higher.
Credit Suisse strategists saw scope for Aussie to rally further to $0.92-$0.93 “driven by technicals and further retracement higher in Aussie rates following the RBA’s change in interest rate wording.”
They recommended selling into this rally. CS remained bearish on A$ and maintain their 12-month forecast of $0.74.
“AUDUSD in the low 0.90s will largely reverse the justification for the RBA’s change in language last week,” the strategists said, adding also that, “More important, the big picture for the AUD is still an outlook for a slowing Chinese economy to depress Australia’s terms of trade much more.”
Dollar-Canada was trading at C$1.0098 Wednesday, in the middle of the day’s range of C$1.0976 to C$1.1025.
At current levels, the pair is closer to the Feb 7 lows near C$1.0968 than to the 2014 peaks near C$1.1224, seen less than two weeks ago on Jan 31.
George Davis, chief technical analyst at RBC Capital Markets, said Tuesday’s daily close below C$1.1033 exposes “C$1.0907 and C$1.0854 as the next support levels to watch.”
“The intermediate uptrend in place suggests that pullbacks to C$1.0854 and C$1.0769 will attract renewed buying interest in USD/CAD for another test of the C$1.1223/1.1235 resistance zone (50% Fibonacci retracement of the 2009-2011 decline),” he said.
Davis stressed, however, that “a daily close above C$1.1235 will now have to be seen in order to trigger a bullish breakout and resumption of the uptrend, with secondary resistance located at C$1.1439.”
Analysts also stressed that the Australian and Canadian dollars, while painted with the same commodity brush, have been on divergent paths in recent months.
“The natural relationship between commodity currencies and commodity prices has gradually broken down in recent months,” said David Fritz and Charles St Arnaud, strategists at Nomura in a note, pointing to both Aussie and Canadian dollar trading action.
This divergence has meant that the three-month correlation between commodity price changes and currencies has turned negative for CAD and NZD, while was “very weak for AUD.”
“As a result, our fair-value models for the commodity currencies suggest that CAD is undervalued by about 3% and AUD is overvalued by about 3%, while NZD is about rightly valued,” Fritz and St Arnaud said.
As the relationship between commodities and commodity currencies normalizes, Nomura expects these currencies “to converge to the level suggested by commodity prices.”
Dollar-Canada could fall as low as C$1.08 “and maybe lower if short positions are closed rapidly,” the strategists said.
Aussie might move lower, “to realign itself with commodity price but, when combined with the large short position already, we think it is likely that realignment would mainly prevent further increases.” Fritz and St Arnaud said.
The International Monetary Fund earlier Wednesday released its Article IV report on Australia, noting that “despite some recent depreciation the real exchange rate, currently in the range of 89 cents to the U.S. dollar, is 5-10% above the level predicted by Australia-specific factors from a medium-term perspective).”
“There are a number of factors contributing to the current high level of the Australian dollar, including the substantial capital inflows to fund the mining sector investment, the gap between domestic and foreign interest rates, and portfolio allocation towards Australian dollar assets by foreign institutional investors,” the IMF said.
“If these factors were to ease, possibly triggered by exit from unconventional monetary policies by major advanced economies, the exchange rate would likely depreciate further, supporting the transition of the economy towards more balanced growth,” the report said.
In terms of commodity prices, the Thomson Reuters Jefferies CRB index stood at 291.7401 Wednesday, on the low side of the day’s range of 291.0925 to 296.6374.
The earlier peak was the highest levels seen since March 28, 2013, when the CRB topped out at 298.71.