NZD yawned as the Reserve Bank left rates untouched (in line with consensus projections). The central bank governor Alan Bollard provides some color on the New Zealand recovery, noting a recovery in export partners (which he believes is sustainable), flattening consumer demand and a recent increase in housing prices. He goes on to note that sustained growth is contingent on the export sector and household savings.

Nothing revolutionary here as the focus on the current account continues but we have to believe volatility in NZD rates is currently being underpriced. With the strength and diversity of various China bear factions at this point, it's almost a foolproof bullish indicator. Additionally, some exports may be more downturn-proof than we believe (e.g. milk powder, see the ZH piece on NZ May trade data). The flip side also begs a simple question: how much lower can they go? It is almost inconceivable for NZD to go ZIRP.

At this point, the Chinese bubble theory is well out there. With a number of high profile public acknowledgements of the liquidity driven bubble over the past 6 months, China is finally looking to take steps to prevent (or at least slow down) the massive publicly funded inflows into related financial markets. With the Shanghai Composite Index down about 22% in August, China is caught in a somewhat tricky situation as it attempts to slow the flood of money without plunging the economy into a further spiral.

Depending on the specific measures taken, we could see a controlled deleveraging or a clumsy, heavyhanded attempt to put the brakes on. The prospect of a highly leveraged Chinese economy facing a sudden liquidity shortage is terrifying for both economic and political reasons. With increasing unemployment for college graduates and a significant deterioration across other macro factors, the only real driver has been record lending by Chinese central banks. Despite all the cosmetic changes, China remains a centrally controlled economy and it is a very tough challenge to manage liquidity flows across the financial system without blowing up the current structure.

The story with oil, much like most commodities, has mostly focused on two factors: tight correlations with other macro products and China.

The correlations can be reasonably expected to weaken a little once we are a little further into the deleveraging process and once we see a more familiar phase of the business cycle but until then, it's something to watch very closely.

In a sign of risk appetite declining, EUR/JPY dipped despite Euroland GDP numbers coming out above consensus. While easy to ascribe the plunge to weak US consumer sentiment, it's interesting to see movement even on more stable pairs.

Separately, the yen closed out on strength versus most commodity currencies as it increasingly becomes the China hedge. As we noted in BRL weakness before, the real dipped for a weekly loss against the dollar for the first time in over a month and seems poised for further weakness.

First, the bad news. Only 14%, an abysmally low number, believe that job prospects will improve over the rest of the year. Nearly 60% believe high unemployment to continue over the next several years, hardly a demand-inducing statistic.

Despite the massive stimulus packages, confidence in government policy retreated with a third straight monthly decline (32% holding unfavorable views), though it is significantly better than the 50% a year ago. Consumers also shied away from big ticket items as homes, vehicles and major household durables declined in July. Additionally, anticipated price discounts continue to remain at their all-time peaks; a consumer-led deflationary indicator, despite the US ZIRP.

Shortly after Wen Jiabao's statement that China will maintain its stimulus, Bloomberg reports that Chinese exports tumbled in July and industrial output numbers came in under consensus. The former is significantly more troublesome, though as this drag on industrial output is going to become a bigger part of the story.

With exports falling 23% and industrial production "only" gaining 10.8%, the Chinese government is going to have to pump in a whole lot more stimulus. The truly puzzling part has to be the following quote:

A release of New Zealand's unemployment information is an interesting experience in reconciling medium-term price action, the general market view and what we are saying in reality.

On a seasonally adjusted basis, we are seeing a 20% increase in unemployment QoQ (the 6th straight quarter of job losses). Curiously, in this case it has been a loss of female vs. male jobs at a clip of roughly 2:1.

BBM Gestao de Recursos issued a statement publicly warning about imminent weakness in BRL and a potential central bank reversal of recent record low rates. BBM's Beny Parnes, himself a former central banker, explains that BBM is mostly scaled out of its positions and believes that most of the wind has been taken out of BBM's big money makers from the first half of the year.

Indeed, BBM's portfolio has significantly benefitted from a 22% surge in BRL and lowered rates - a position we discussed back in March, though we overshot rates by a quarter point - but Parnes defends the paring back, citing "less opportunity" in the current environment. We agree with the sentiment despite the recent dollar beatdown since mid April. Most of the fundamental picture has been accounted for with the recent run-up but increased liquidity may provide a second wind. Emerging markets continue to be interesting, especially from a long-term view, and we'll continue to keep an eye out.

In a continuation of central bank confidence, the BoC maintained rates while announcing their inflation outlook in the medium term. The relevant paragraph:

Total CPI inflation declined to -0.3 per cent in June and should trough in the third quarter of this year before returning to the 2 per cent target in the second quarter of 2011 as aggregate supply and demand return to balance. Core inflation held up at 1.9 per cent in the second quarter of 2009. The Bank still expects core inflation to diminish in the second half of this year before gradually returning to 2 per cent in the second quarter of 2011.

Recent news coming out indicates that investors are buying the indications from earnings reports, housing data and other tepid macro news releases - of course the resulting dollar and yen weakness is not ultimately surprising, no matter what our views on the "safe haven" theory.

The implication of a strong dollar/yen rebound in the event of another crash has been pretty well documented by various outlets but the more interesting story is any further downside risk to the dollar/yen. It's pretty clear that the somewhat linear relationship between say, EUR/USD and any number of bullish indicators (SPY, HG, the Big Mac index), until now is somewhat untenable going forward and is likely to at least slow down. If the bullish sentiment is ultimately right and we have returned to "normal", the ridiculously strong macro linkages we have been seeing until now are likely to break. However, if we see a bounce back south any gains posted can vaporize as quickly as they came.

Looking at historical data always gives a great sense of perspective (in this case, table 2.1 from the White House site). The graphic below represents the remarkable increase in spread between individuals and corporations when it comes to the burden of funding the federal government. This doesn't include other sources like social security payments, excise taxes and other sources - just plain consumers and businesses, Econ 101.

There are numerous points to take away but we want to highlight a couple:

Some huge, hard-to-believe numbers coming from the Chinese - if I had a nickel for every time I wrote that... I could melt all those nickels, sell it on the spot market and buy enough gold to plate my new ZH decal.

But seriously - is anyone buying this? The story being put forward by the Chinese is that the government pumped in some stimulus which has been enough to get the crank rolling again and leads to statements like:

The returns of some major FX players are serving as a proxied summary of the first 6 months of 2009, as Bloomberg reports both FX Concepts and John W. Henry's currency units are down so far this year.

Due to the choppy price action, the trend followers have not been looking too hot (if you don't believe me, look at the track record of a basic 50/200 dma on EUR/USD). The major reason(s) could be the unclear picture on inflation (both in the US and in the majors) but additional factors have come into play including the re-coupling of many markets, the surprising equity rally in Q2 and a suspiciously steady decrease in the price of vol. However, we are likely to see some huge macro factors come into play over the second half of this year so the record is likely to look significantly better by the end of the year.

An interesting release coming out of New Zealand recently on trade numbers for May - interesting because on the surface, it seems to fall in line with many of the popular macro views but how digging through the numbers produces some interesting data points. The high level message is pretty simple: imports got crushed and exports saw a decent rise, resulting in the largest trade balance (as % of exports) in 16 years.

Well, your favorite macro correspondent is back from his break. It's going to take a few days to get back into the swing of things but I may not have that much time...

At least not the way that Americans are viewing it. There have been many, many comparisons in the media to the Great Depression, the worst economic climate in the past 70 years, etc. but the reality is that this is only slightly worse than normal for the Japanese (especially in the context of the last 20 years). With the release of consumer confidence numbers yesterday, it's interesting to see the Japanese consumer reaction (click on chart to enlarge).

No, seriously - this is actually good news. The basic problem was an overleveraging across all sectors of the economy and this is good news because the US consumer unequivocally needs to deleverage before a recovery can be viable. The choice has always been simple if you owe too much money: declare bankruptcy, inflate your way out of it or find a sucker to help you roll it until you can pay it off.

We are starting to think that beating markets in this environment is starting to devolve into a reading comprehension exercise. In the latest edition, the green shoots crowd are jumping on the release of productivity numbers by the BLS Thursday - nonfarm productivity is up 0.8%, above consensus numbers at 0.6% after going down 0.4% the previous quarter. However, it's a bad picture when the main driver is due to hours worked dropping 9% and output only dropping 8.2% (poof, productivity gains!).

By now, most smart money has typically pegged the US recovery in late 09, early 2010. ZH is somewhat dismayed to see the assumption being that once the economy gets going again, we're going to return to the '05-'07 levels of good times. However, we have to believe that we are merely going from disastrous to just kind of bad. Specifically, the next few years are not going to be pretty even once the deleveraging of the US economy is over. As we come out of it we're going to see a repeat of the infamous summer of '08 with oil hitting triple digits, except the header is likely going to be reflected across commodities not just oil. So, let's explore this idea...

On Monday's release of housing numbers, Bloomberg reports more false positives on the economic recovery path. On the second straight month of pending home sales rising (up 3.2%), many are calling this the bottom, pretty much THE leading indicator that we are close to out of the woods. I mean, come on... housing got us into this mess, it'll get us out, right? A little-noticed follow up, though, was that the Housing Affordability Index was also at record highs - basically, after a long period of restrained consumption, people are reacting to lower home prices.