No Trouble In Little China And Nothing Doing In Oz

It was a relatively quiet overnight session on the news front, although you wouldn’t know it from the number of Bloomberg e-mails in my inbox.

China’s FX reserves “unexpectedly” rose in February although I’m not entirely sure why everyone is using the term “unexpectedly” here. Have you heard much lately about the yuan? No? Exactly.

Of course you shouldn’t discount the Politburo’s penchant for making sure the data (any data) looks firm during the NPC, so there very well might be some … hmmm… let’s call it “smoothing” going on here.

Whatever the case, FX reserves rose $6.9 billion to $3.005 trillion, compared with a medium estimate of $2.969 trillion in a Bloomberg survey. Here’s the full breakdown:

End-Feb. forex reserves rose $6.92b from end-Jan.
China forex reserves rose for the first time since June 2016
End-Feb. SDR-denominated forex reserves at SDR 2.22t vs SDR 2.21t at end-Jan.
End-Feb. IMF reserve position at $9.67b vs $9.7b at end-Jan.
End-Feb. SDRs at $9.74b vs $9.77b at end-Jan.

As regular readers will recall, Goldman likes to take a wait and see approach to the first read on China’s reserves. Around mid-month the bank will analyze the “PBOC’s FX position” and put out a new estimate. You might say Goldman likes to “reserve” judgment. Here’s the bank’s take:

The PBOC’s FX reserves unexpectedly increased in Feb, by US$7bn, to just above US$3tn again. We estimate currency valuation effects at about -US$13bn (assuming the currency composition of China’s reserves is similar to that of the global average). Excluding such effects, reported FX reserves would possibly have increased by US$19bn (vs. -US$37bn in Jan). However, estimates of overall valuation effects can be noisy–indeed, SAFE indicated that the market value of the reserve portfolio increased in Feb, which counteracted the negative currency valuation effect. That said, it is unclear exactly how large these effects were in Feb (and it has not always been obvious how the portfolio valuation effects are recorded). Therefore, another dataset, the “PBOC’s FX position” (usually released in the middle of the month), should give us a much better sense of the PBOC’s FX sales net of valuation effects, as this dataset shows the PBOC’s FX assets recorded at book value. On several occasions in the past year this dataset has suggested a meaningfully different amount of FX sales by the PBOC than implied by the reserve data. For reference, in January the PBOC’s FX position dataset showed a decline of US$30bn, even after a strong trade surplus of US$33bn (including merchandise and service trade). The trade surplus was likely not nearly as strong in Feb due to Chinese new year seasonality–in other words, the capital account dynamics would have needed to undergo a significant reversal for the PBOC to accumulate (rather than de-accumulate) FX assets in Feb. In general, reserve data provide only partial information on the FX flow situation, and we will await further SAFE and PBOC data to assess the underlying trend.

Finally, do note that $3 trillion is a psychologically important number in terms of China’s reserves so it should perhaps come as no surprise that the country’s war chest conveniently rises above that figure just as the NPC kicks off.

Moving on, the RBA stood pat to exactly no one’s surprise. Here’s the bullet point summary from Bloomberg for anyone who cares:

House prices still rising in Sydney and Melbourne also argues for holding rate: Sydney property jumped 2.6% in February and Melbourne climbed 1.5%
Iron ore and coal prices benefiting from stimulus in China last year and need for stability in 2017 amid twice-a-decade reshuffle of senior leadership posts
Unemployment fell to 5.7% in January, but part-time positions still dominate, meaning labor-market slack remains significant
Inflation still below central bank’s 2%-3% target; Aussie dollar climbed more than 5% this year, reflecting higher commodity prices; probably unhelpful for inflation picture given it will compress import prices

Th aussie trimmed gains following the decision. Some spot desks were left with AUD/USD longs immediately before the RBA’s decision as leveraged accounts sold above 0.7615, an Asia-based FX trader said.

As you can see from the chart, the aussie subsequently spiked higher as the RBA statement helped spur fund-related demand. “If you take AUD/USD and two-year rate differentials you might see that Aussie is way overvalued,” Simon Pianfetti, senior manager at Sumitomo Mitsui Trust said. “But just looking at the commodity rally and EM sustaining positive momentum, Aussie is still a buy — preferably against the yen.”

Aaaand a few minutes after those comments, AUDUSD slid lower “as traders took note of the RBA’s warning over the negative effects of a strong currency.” Whatever.

Meanwhile, in Europe, German factory orders plunged at the quickest pace in eight years. “Orders, adjusted for seasonal swings and inflation, fell 7.4 percent from December, when they increased 5.2 percent, data from the Economy Ministry in Berlin showed on Tuesday,” Bloomberg writes, adding that “the typically volatile reading compares with a median estimate for a 2.5 percent decline in a Bloomberg survey.”

We also got a look at euro-area growth as GDP rose 0.4% in Q4. Here’s the granular breakdown:

Eurozone GDP Expands 0.4% Q/q in 4Q; Flash Reading +0.4% Q/q
Eurostat reports Eurozone GDP rose 1.7% y/y vs flash +1.7% y/y.
Household consumption rose 0.4% q/q; rose 1.8% y/y
Gross fixed capital formation rose 0.6% q/q; rose 1.5% y/y
Government expenditure rose 0.4% q/q; rose 1.6% y/y
Exports rose 1.5% q/q; Imports rose 2% q/q
EU28 GDP rose 0.5% q/q; rose 1.9% y/y

Don’t forget, we’ve got Draghi on deck this week and every piece of data that seems to confirm eurozone growth and/or inflation is on the move, puts more pressure on the ECB to explain if/how/when they’re going to start meaningfully pulling back stimulus.

Here’s your overnight market wrap (as usual, EU market data up to date as of pixel time):