Traders spooked by oil price volatility, Chinese value of imports explains things, commodity currencies suffer, ASX futures 35 points lower

Yesterday China released its year-on-year value of imports for November, which were expected to be 4% higher than the year earlier, not dissimilar to the previous month's result. However, rather than rise by 4%, the value fell by 6.7%. The same value pertaining to exports rose by 4.7%, but the market was expecting an 8% figure. Its trade balance naturally remained positive; however, it turned out to be a much worse customer of its exporting partners than expected and this helps explain why the demand side of the commodity equation has been compounding the excessive supply, with particular regard to iron ore and oil markets. You can see on today's second chart (Australia, Canadian and New Zealand dollars vs. US dollar) that so-called commodity currencies are being battered due to the falling value of their exports and are a favourite among currency traders as shorts. The big question that every trader should be asking themselves is where we sit in the cycle in regard to these sloppy supply/demand dynamics that are driving commodity exporting economies lower. And this requires a firm view on China.

Views on China are polarised - some will say falling commodity prices are symptomatic of an imploding economy there, led by the weakening effect of government financial policies and a cooling housing market with its prospective impact on GDP via asset values and related industrial operations weakening; others will say that falling input prices related to weaker commodity markets will drive margins and economic growth in China and the falling value of local-currency imports are a natural bi-product of this weakness - easily dismissed.

One thing is for sure - the global economy is in chicken or egg mode: The world needs China to grow and lift Asia with it, Asia needs Europe and Japan to grow to be the customers that they need to be in order for their economies to live up to the 'growth-engine' expectations that investors around the world have come to expect. There's one thing that is making Asia's job a heck of a lot harder than it needs to be, and that is the swift strength of the US dollar.

As the US Federal Reserve fuelled its multiple quantitative easing programs during the post-GFC period, one of the obvious trades to many was to borrow cheap US dollars (at low interest) and loan it to emerging economies that were showing much higher prospects for growth and were happy to pay much higher interest rates due to the less stable nature of their economies. As a short-term trade, this made excellent sense - borrow low, lend high. However, those borrowers now face the prospect of ballooning values of debt due to the increase in the value of the US dollar. If the operations that employed the debt in the first place aren't making profits in US dollars, then the cost of that debt's principal and interest repayments has become 11.74% higher (using a simple US dollar index comparison, see today's first chart) since the middle of 2014.

It is no wonder then that globalisation and its effect on the relationships between global economies creates a need for the world to work together to solve each other's problems. And in my view, the elephant in the room still looks the same as it has done for the past few years - EUROPE! In the absence of a short-term outcome on commodity price stabilisation and Chinese growth stability, the world's primary economic focus should be on the #1 collective driver of global GDP that is presently out of order: The European Union.

Today's last chart shows the weakness of the euro, in the form of the EURUSD currency pair. Yes it has certainly fallen quite a way this year, but its year-to-date 9.92% depreciation against the US dollar is not nearly enough to help its industries thrive. The European Central Bank also knows that this is not a problem pertaining only to industry, rather it needs to implement measures that will encourage consumer sentiment to fuel domestic demand and jobs. The threat of deflation is now so great and so universal that I think markets are right to gear up for a big 2015 EU monetary bonanza with respect to the broad asset purchases that will have to take place to keep it out of deep deflation as a whole. The world depends upon it.

Today’s charts are taken from the Rivkin Trader platform. 30,000 global instruments available to trade including FX, commodities, index, ETFs and international shares. Trade Australian share CFDs from just $8 or 0.10%. Click here or phone 1300 748 546 to get your free $100,000 demo account.

Upcoming economic announcements:No high-impact data out today.

comments powered by Disqus

DISCLAIMER: Rivkin aims to provide clear and simple information to those visiting our website. If any part of this disclaimer does not make sense, please phone Rivkin and ask to speak with a member of our Dealing and Relationship Management Team. Rivkin provides general advice and dealing services on securities, derivatives and superannuation (SMSF). Rivkin also provide SMSF administration and accounting services. Rivkin does not provide advice that takes into account your, or anybody else's, investment objectives, financial situation or needs. We strongly suggest that you consult an independent, licenced financial advisor before acting upon any information contained on this website. Investing in and trading securities (such as shares listed on the ASX) and/or derivatives (such as Contracts for Difference or 'CFDs') carry financial risks. CFDs carry with them various additional risks that differ from more simple securities such as fully-paid company shares. Some of these risks include not owning the underlying instrument from which a price is being derived, settling trades 'over the counter' with a financial institution rather than on a stock exchange, and using leverage to gain access to trades that may have a higher face value than your initial deposit. This risk of leverage means that it is possible to lose more than your initial investment. Our aim is to create more life choices for our clients, which means improving the wealth of clients throughout many market cycles by nurturing a relationship spanning many years. If you are not comfortable with your understanding of the risks involved before using a Rivkin product and service, please contact our office to seek further information or a Product Disclosure Statement, or make an appointment to sit with one of our friendly financial experts. It is in our interest for your Rivkin experience to be a rewarding and comfortable one. Rivkin is a trading name of Rivkin Securities ABN 87123290602, which holds Australian Financial Services Licence No. 332 802.