Mid-European Session – Dollar rebounds on strong China data; Yen and euro sag

Raffi Boyadjian, XM Investment Research Desk

Asian and European equity markets were boosted on Wednesday by a surprise improvement in Chinese trade in March. China reported an 11.5% year-on-year jump in exports in March, beating expectations of a 2.5% increase. The figure was a sharp turnaround from the 25.3% drop in February. Imports also surprised on the upside as they declined by 7.6% versus estimates of a 10.2% drop.

Analysts cautioned that the big jump in exports may be due to seasonal factors. However, investors were encouraged by the increase in imports of commodities, which could be a sign of a recovery in demand from the world’s second largest economy.

The Australian dollar, which is seen as a liquid proxy for the Chinese economy, rose to a 2-week high after the positive data. The aussie had a roller-coaster day as it had weakened slightly earlier in Asian session on disappointing Westpac consumer confidence data out of Australia. But following the Chinese trade numbers, it climbed to a high of 0.7715 versus the US dollar before slipping back in European trading. The aussie briefly plunged to 0.7644 as crude oil prices fell on profit-taking, before bouncing back to around 0.7674 in mid-European session.

The US dollar was another beneficiary of the risk-on sentiment as the dollar index stood 0.6% higher in mid-European session. The greenback reclaimed the 109 level against the yen for the first time in nearly a week to climb to 109.25 yen. The euro followed the Japanese currency lower on Wednesday to drop to a 2-week low of 1.1307 dollars.

Worse-than-expected industrial production figures for the Eurozone further dampened sentiment for the single currency. Industrial output declined by 0.8% month-on-month in February, missing estimates of a 0.7% drop.

The pound was mixed in Wednesday as risk-appetite helped it move higher against the euro and the yen. But it was down against the dollar following a strong warning by the IMF yesterday on the risks of a UK exit from the European Union. The IMF also downgraded the UK’s growth forecasts for 2016 which added to sterling’s woes. The pound was last trading 0.3% lower at 1.4224 dollars.

Crude oil led commodity prices lower today as profit-taking halted oil’s three-day rally. US oil futures were down at $41.53 a barrel in mid-European trading, and this pushed commodity-linked currencies lower, particularly the Canadian dollar. The USDCAD pair was firmer today and testing the 1.28 level following three straight days of losses.

Coming up later today, US retail sales will be watched closely while the Bank of Canada will announce its latest monetary policy decision as well as hold a press conference. Although no change in rates is expected by the Bank of Canada, traders will be on the standby for possible comments regarding the loonie’s recent sharp appreciation.