Asia Impulses Dominate Activity

The US dollar is narrowly mixed against the major European currencies, but the dollar-bloc is stronger and the yen continues to sport a soft profile, though within yesterday's ranges. Events in Asia remain key to the global capital markets.

China shocked the market by reporting a $880 mln trade deficit instead of a $15.4 bln surplus the consensus expected.  Exports reportedly rose 10%.  The market had expected a 11.7% increase, but the bigger surprise was that imports jumped 14.1%, which was twice the consensus forecast.  The strong imports may have helped underpin the Australian dollar, for example, which is trading at its best level since late January and appears headed for $1.06.

Although the miss was not as big, it is really the exports that have people scratching their heads and adding more fuel to the skeptical attitude that many have toward Chinese data.  That said, a recent San Francisco Fed report suggested that China's GDP figures, which are also often greeted with skepticism, are actually consistent with a range of other data.  In any event, China reported that exports to the US, EU, Japan, South Korea, and Canada fell.  

However, there was an almost 98% jump in PRC exports to Hong Kong, which are a little more than a quarter of China's overall exports.  In addition, China reported a 45% jump in exports to Taiwan, though Taiwan had recently reported a 1.2% decline in imports from China.  

Separately, we note that today is the first day of direct trading between China's yuan and the Australian dollar.  Although many observers see this as more evidence of the internationalization of the yuan, we are a bit skeptical.  The fact that it is even news reflects the slowness in which China is implementing reforms.  Moreover, the way the foreign exchange market works is that about 90% of the transactions go through the dollar because that is where the liquidity is.  So yes, one can begin trading the yuan against the Australian dollar, it does not mean the market really will.  One can trade the South African rand against the Australian dollar, but the dealers will go through the US dollar.  

Meanwhile, the market continues to digest the Q-Squared--the qualitative and quantitative easing by the BOJ.  This has obviously weighed on the yen. So far the international response has been quite mild.  However, it is in the JGB market that something seems amiss.  Even though the BOJ is going to buy something on the magnitude of 70% of all new issuance, JGBs are selling off.  The benchmark 10-year yield rose 5.5 bp today and is now up 2.3 bp over the past five day.  The 5-year yield is up 6 bp today and almost 12 bp over the past week.  The 30-year rose a 7 bp today, cutting its advance over the past week in half.  

We expect institutional asset managers in Japan, like life insurers and pension funds, to take some time to devise new allocation plans for this fiscal year.  Mizuho conducted a survey of retail investors and as they have done consistently in recent years the order of determining factors for this investment is safety (46.7%), liquidity (24.7%) and interest rate (16.9%).  The survey also found that 84.5% indicated "absolutely" no intention of buying financial products that may have high profitability profiles, but subject to losses as well.  This has risen from 78.3% before Lehman's demise.  

Tomorrow the Ministry of Finance will report the latest week;y portfolio flow data.  It will cover the first week in the new fiscal year.  Japanese investors have been net sellers of foreign bonds in all but 3 weeks of the first 13 this calendar year.  It would not be surprising to see some new purchases, but they are likely to disappoint those that think that BOJ Kuroda's announcement has unleashed a wall of money from Japan. 

Japan did report that bank lending rose in March by 1.6% after a 1.5% rise in February.  It is the 16th consecutive month that bank lending has increased.  Most of this seems to be accounted for by the reconstruction efforts.  However, the report also cited loans for foreign direct investment purposes too.  

In Europe, Italy and Spain disappointed with February industrial production reports, though France had a rare upside surprise.  The 0.7% rise in the euro area's second largest economy nearly offset in full the 0.8% decline posted in January, and reduces the year-over-year decline to 2.5% from 3.6%.  The industrial output for the euro zone as a whole is due at the end of the week.  Surveys call for a flat report, but the risk is still to the downside.  

Greece has denied the German paper report yesterday that depositors were going to get bailed into the on-going bank recapitalization efforts. In fact, the Greece reported that deposits rose 1.5 bln euros in March. The real pressing issue now is the negotiations with the Troika over civil service reforms that are being demanded in exchange for aid. In particular, the Troika wants an overhaul that includes 7k layoffs this year and another 20k next year. The government is balking. With a large bond redemption next month, there is still time to negotiate. 

Separately, the bank recap efforts are proceeding and the Bank of Greece is suggesting that the Eurobank and National Bank merger may still take place. The Greek stock market is extended its recent gains. The 1.4% gains today brings the 5-day advance to over 6% and financials are up over 3% in afternoon turnover in Athens. Greek bonds are also firm and among the best performers in Europe today with the 10-year yield off 7 bp, bringing the 5-day decline in yield to 46 bp. Although some observers suggest that the gains in European peripheral bonds markets is a function of Japan's Q-squared (qualitative and quantitative easing), we see no sign of Mrs Watananbe's hand in Greece.