FX Strategy Weekly

In an effort to welcome President Obama in his visit to China, Liu Mingkang, a senior Chinese banking official was quoted in the FT saying Fed policy, weak USD are fueling a “huge carry trade” and suggested that it may be a threat to the global recovery. However, Mr. Mingkang is a bit late to the party in beating the “USD as a funding currency/carry trade” drum. Over the past two weeks, a number of officials, from the IMF, to Hong Kong’s Donald Tsang have warned on the “carry trade”.

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FX/Eco Data Notes

Australian Retail sales surprised to the downside contracting by -0.2% MoM vs. forecasts of 0.7%. The decline was led by sales in department stores which contracted by -2.9%, clothing and soft goods, by -0.8%. Food sales were flat and Café and Restaurants were up 1.1%. Despite weak number, AUD/USD only sold off briefly as risk is back on across the board as of last night.

Euro Zone Industrial producer prices fell more than expected but 7.7% YoY, -0.4% MoM but data were outweighed by other factors in terms of market impact.

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FX/Eco Data Notes - Turn Up the Volume

The volume has been turned up on verbal currency intervention. In a speech last night discussing the Fed’s balance sheet and unconventional policy measures, Bernanke said that “rates would be raised when necessary”. Markets interpreted this as a bit of a change in policy bias and sparked a rally in USD. To be clear, I do not consider this a change in interest rate policy. This is simply a change in rhetoric as a response to relentless USD weakness.

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