Kathy Lien: USD/CAD Comes Within a Whisker of YTD Low

Saturday, July 25th, 2009

This comment is courtesy of Kathy Lien, Director, Currency Research, GFT (Global Forex Trading).*

With no economic data from any of the 3 commodity producing countries, the Canadian, Australian and New Zealand dollars traded higher. Finance Minister Jim Flaherty confirmed the comments made by the Bank of Canada this week. He said he sees encouraging signs that the domestic economy is stabilizing and there is potential for growth in the third and fourth quarters, but he is worried about the impact of the strong Canadian dollar. The loonie came within a whisker of testing its year to date high. In the week ahead, outside of GDP numbers on Friday, there is no market moving Canadian data on the calendar. Therefore we expect the loonie to key off oil prices. Should crude heads towards $70, USD/CAD could fall to a new yearly low. If it simply stabilizes here or falls, we may see a sharp rebound in the currency pair. There were no exciting developments for the Australian or New Zealand dollars but that could change next week with the Reserve Bank of New Zealand meeting to discuss monetary policy. Australian Central Bank Governor Stevens will also be delivering a speech on the “Challenges for Economic Policy.” For the NZD and AUD, official comments will be key.

Source: GFT Forex/FX360.com, July 24, 2009

Tags: Bank Of Canada, Bank Of New Zealand, Canada, Canadian Dollar, Central Bank Governor, Commodities, Currency Research, Domestic Economy, Economic Data, economic policy, Finance Minister Jim Flaherty, Global Forex Trading, Higher Finance, Loonie, Monetary Policy, New Zealand Dollars, oil, Oil Prices, Rebound, Reserve Bank Of New Zealand, Target, Usd Cad, Whisker
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Good Reasons to Buy What China Buys

Saturday, July 25th, 2009

This article is a guest contribution by Kathy Lien, Director, Currency Research, GFT (Global Forex Trading).*

July 24, 2009 - Last week, China reported that their foreign exchange reserves exceeded $2 trillion and it is under this environment that the U.S. and China will begin their Economic and Strategic Dialogue on Monday. As forex traders and investors look for opportunities in the second half of the year, we encourage everyone to buy what China buys. On Tuesday, Premier Wen Jiabao pushed Chinese companies to hasten their “going out strategy” and for the first time ever, he said the government could use foreign exchange reserves to help companies invest abroad. In other words, the Chinese government has basically given domestic firms the political and financial support to go on a spending spree. Although they won’t be spending the entire $2.132 trillion, even 10 percent of that would be substantial. With this mandate from China, we explore what areas of the world and sectors of the global economy could benefit the most from a Chinese shopping spree.

First let’s take a look at what China is importing. Based upon the following table, in 2008, China’s top imports were electrical material and equipment followed by mineral fuel, oil, ores, slag and ash. Commodity imports have seen the strongest growth and with their investments into infrastructure, we expect this trend to continue.

Although the U.S. is China’s number one trade partner, they are not the country’s top import supplier, this title belongs to Japan. However what we think is more important are the countries that have seen the most significant growth in their exports to China. Based upon the tables below, imports from Brazil and Saudi Arabia grew by more than 60 percent while imports from Australia rose 45 percent in 2008. China buys products like crude oil rom Saudi Arabia, iron ore from Brazil and copper from Australia.

Resources

Since China likes to take stakes in companies that meet their resource needs, then we would expect their domestic firms to look for investments in companies that produce electrical machinery, power generation equipment and commodities in countries like Saudi Arabia, Brazil, Australia and even Japan or Germany. So from that perspective, we believe that for currency traders, this would provide opportunities in the Brazil Real, Australian Dollar and Japanese Yen. In terms of resource demand, we also believe that China will increase their holdings of gold. Based upon the World Gold Council’s March 2009 data, China’s gold holdings on an absolute and percentage basis pales in comparison to the holdings of major European nations and the United States. Gold’s share of China’s total forex reserves is only 0.9 percent compared to a share of 76.5 percent in the Eurozone and 78.9 percent in the U.S. On an absolute basis, China owns 1.054 tonnes of gold versus the Eurozone’s 11, 065 tonnes and the U.S.’ 8,133.5 tonnes. If China is seriously worried about the safety of their investments in U.S. dollars, then we strongly believe that they will continue to accumulate gold which would be positive for Australia. China is the world’s largest gold producer so they do not need to import gold from Australia but if gold prices rise, so should the Australian dollar.

China also invests heavily into Africa and we expect this trend to continue. By 2010, China’s business interests in Africa are expected to reach $100 billion. Their investments are in products such as oil, lumber, refining, agriculture, mining, textiles and banking.

China’s aggressive stimulus plan to jumpstart the economy has also been focused on infrastructure projects. Therefore companies that provide basic materials that serve the construction sector will also benefit.

Source: Wikipedia

Consumer Demand

From a consumer demand perspective, a growing middle class has boosted demand for luxury items and technology. Hermes for example reported surprisingly strong earnings in the second quarter. Everyone touted the company’s success to the recession proof part of the population in the U.S. economy but beneath the headlines we see that Hermes biggest success was in Asia. Sales to Asia excluding Japan increased 36.7 percent compared to a 13.5 percent increase in sales in America. In particular, they credited their earnings to growing Chinese demand. The strength of Chinese demand has already been displayed in recent quarterly reports by companies like Intel and Cypress Semiconductors. So we should invest in what Chinese consumers buy.

Buy What China Buys

The sheer size of reserves that China has in its coffers makes for many new investment opportunities. For the individual, it is important to recognize China’s high demand for metals and their interest in technology companies. Furthermore, development in countries like Saudi Arabia and Brazil should create new markets of interest. As a savvy investor, China knows that it pays to diversify and therefore U.S. Treasuries will not be the only thing that China is interested in investing in. The best opportunities in the second half of the year could be to buy what China buys.

Copyright 2009, Kathy Lien - REPRINTED WITH PERMISSION

Tags: Australia Resources, Chinese Companies, Chinese Government, Commodities, Commodity Imports, Crude Oil, Currency Research, Electrical Material, Foreign Exchange Reserves, Forex Traders, Fuel Oil, Global Economy, Global Forex Trading, Iron Ore, oil, Premier Wen Jiabao, Resou, Saudi Arabia, Shopping Spree, Slag, Spending Spree, Top Import, Trade Partner, Trillion, Wen Jiabao
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Sprott: “We prefer to invest in real things”

Saturday, July 25th, 2009

Eric Sprott has penned his latest newsletter,”It’s the Real Economy, Stupid,” a lucid look at the real economy versus the market’s optimistic pricing in of positive sentiment. Sprott says the market is ignoring the facts:

It begins with:

We are now in the early stages of a depression. The economic indicators we follow to track real economic activity are all signaling a slowdown of massive proportions. You wouldn’t know it reading the mainstream papers of course - they all focus on the relative decline in the slowdown’s intensity. Reading about the slowdown ‘slowing down’ is not the same as growth however, and does not warrant excitement in our opinion.

Our title this month paraphrases one of Bill Clinton’s presidential campaign messages from 1992. As one of the three key themes in Clinton’s campaign, “The economy, stupid” was printed on a sign in his headquarters in Little Rock to help campaign workers stay on message. This month we’re keeping it simple by focusing on the real economy and its implications for the stock market.

And ends with:

In our view, the only thing propping this market up is investor sentiment. Earnings have not improved. Keep it simple, stupid - investing is and has always been about the real economy, and this market is ignoring the hard data. You can invest in sentiment if you want to, but as we have said before, we prefer to invest in real things.

In a nutshell, the emperor has no clothes. Click here or on the image below to download complete newsletter.

Tags: Bill Clinton, Campaign Messages, Campaign Workers, Depression, Earnings, Economic Activity, Economic Indicators, Economy, Emperor Has No Clothes, Eric Sprott, Excitement, Intensity, Investor Sentiment, Massive Proportions, Nutshell, Paraphrases, Presidential Campaign, Relative Decline, Slowdown, Stock Market
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