15 February, 2019
There could be some volatility in currency markets at the end of the trading session with the release of a series of second-tier economic data out of the US, the last significant bits of information for the markets ahead of the extended weekend (a reminder that Monday is a trading holiday in the US). With trade talks ongoing, it wouldn’t be surprising that investors were a little more keen to stay away from risk positions as trading winds down.
Import and export price data collection stayed unaffected by the US government shutdown since the Bureau of Labor Statistics was funded throughout. Therefore, this data release is in line with the schedule and counts as “new data.”
Import and export prices are an essential factor in determining the terms of trade, which we discussed at length previously; higher import prices can implicate inflation rates, lower import prices can implicate the currency price itself. This data can have a stronger impact on the currency than the trade balance.
Other trade issues are at stake when parsing this data. The day before yesterday we had the release of the Chinese trade balance. This is especially relevant to the US as part of the ongoing trade war, and it showed some interesting implications.
Despite analysts’ talk of doom and gloom regarding the trade war, Chinese exports have increased over the prior year +9.1% according to the latest data. However, that increase is not going to the US; and the trade balance has narrowed, but still favoring China. More importantly, imports from the US dropped 41.2% from the prior year. Exports, however, declined only 2.4% (a factor of the massive trade surplus).
Other surprising bits of data in the release relates to the oft-cited example of US soybean exports; allegedly the main impact points out to Chinese tariffs. However, in January China imports showed a drop of 13% compared to the prior year – while certainly an impact, China is still buying a substantial quantity. It’s relevant to point out that the data for January and February can signal to distortions due to the Lunar New Year, so longer-term trends need to be observed to get a handle on the real effect of the trade war beyond academic assumptions.
The MCSI survey done by the University of Michigan, which gives its name, covers the entire country. 100 is dividing line between positive (above) and negative (below) sentiment and outlook. It’s the average of the survey respondents view of the current situation and how they expect the future position.
Last month’s MCSI dropped down to 91.2, the lowest since Trump took office – though the survey was taken amid the government shutdown (it was published after the shutdown ended). The index poked above 100 only twice in the last year, but this is mostly due to the forward aspect. The current situation has repeatedly marked above 100, but the forward-looking sentiment has had trouble cracking 90.
With the shutdown now over, expectations are for the index to move higher again, but not to the levels previously recorded: 94.5 is the consensus of expectations.
For reference, what we might expect from the market, the EURUSD on average moves between 15 and 20 pips within ten minutes of the release; and moves up to 50 pips within four hours of the release. These moves are, naturally, more pronounced in the GBPUSD. These are averages and do not necessarily predict how the market will react for a given news event.
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