FX RECOVERY TRADE STILL UNCERTAIN
DIRECTOR OF CURRENCY RESEARCH, GFT
THE central question facing the currency market is whether the economy will maintain its pace of recovery. Last week the recovery trade received a substantial boost when both Australia and Canada reported better than expected employment numbers. Australia added 45,900 jobs and the country’s jobless rate fell to an enviable 5.1 per cent. Meanwhile Canada generated a whopping 93,200 jobs.
Canada, a country only one tenth the size of the US in terms of population, was able to create more jobs in June than its much bigger neighbour. This suggests that the commodity-based economies continue to benefit from strong demand from China and the rest of the developing world. The robust growth in Canadian employment should spur the Bank of Canada to become more aggressive with its monetary tightening programme. The loonie should outperform as a result.
But despite the strong performance of comodity dollar economies, investors remain sceptical about global growth. The recovery has always been predicated on the idea that the US would become the “second front” in the battle for growth, but so far US economic performance has disappointed. There are also signs that Chinese growth may be decelerating. Although China generated strong trade balance numbers with record exports for the month of June, imports fell for the third straight month. Thus, the growth numbers from Australia and Canada may have peaked and could start to decline.
For the recovery trade to maintain momentum, the US must become the second driver of global growth. I am dubious that this will occur in the foreseeable future given the tepid state of US economic activity. That’s why today’s retail sales report could set the trading tone for the currency market for the rest of the week.
Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary at www.GFTUK.com/commentary or e-mail [email protected].