Markets have been quite confused to many recently. Economic data from U.S. last week have shown that there are still many challenges in economic recovery. Housing starts, building permits, retail, unemployment claims, and Philadelphia Fed Survey all were very disappointed. However, markets around the world shrugged off the negative news and rallied ahead.
There were several reasons that markets ignored the bad news. For one Spanish bond auction enjoyed the better demand than expectation, despite that the yield is much higher than the last auction. Then, Fed hinted that deflation is still its enemy No. 1. This means that Fed won’t exit the monetary stimulus status anytime soon. Over the weekend, China suggested that it will resume the gradual appreciation of its currency soon. This is another piece of good news for markets. Other Asian exporters’ currencies should follow China and appreciate as well. Hot money will flow into Asia to take advantage of the stronger currencies there. Asian assets should then experience a wave of rally as the result.
The next step, I suggest everyone to watch Chinese trade balance closely. The negative economic news in U.S. and the fiscal cuts in EU countries all imply that demands in the developed countries will drop in the second half of 2010. China also saw that its workers want to enjoy higher wages in the recent weeks. Adding the appreciating currency, Chinese trade surplus could disappear very quickly just like March. Then, it may well spell the end of this appreciation process.
Disclosure: no position