The swings in the equity markets are subsiding, bond yields are firm and the US dollar is extending its recovery. Although US equities closed lower, the MSCI Asia Pacific Index snapped a four-day drop by posting a 0.25% gain. However, the MSCI Emerging Markets Index is off nearly as much, though the range was modest. European markets are also lower, and the range for the Dow Jones Stoxx 600 is the smallest in more than a week.  

There have been several developments in addition to the price action to note. First, China reported a January trade surplus that was less than half the forecast size. The $20.34 bln surplus contrasts with expectations for a little changed reported from the December $54.7 bln. Exports were up 11.1%, which marked a small acceleration. That was not issue. Imports surged 36.9%. They were up 4.5% year-over-year in December, and while acceleration was expected, nothing on this magnitude was anticipated.  

The data is likely distorted by the impact of the Lunar New Year, which was earlier in 2017. But the optics work in the China’s favor which is facing increased trade tensions with the US. By China’s calculations, its trade surplus with the US narrowed to $22 bln. Exports rose 12.5, while imports from the US rose 26.5%.    

Separately, a Reuters reported that there may be a loosening up of the controls of outbound capital flows (QDLP), and the yuan, which has been strengthening steadily since mid-December snapped back today. The US dollar rose 0.75% against the yuan, its biggest move since the 2015 devaluation. The greenback returned to levels seen at the end of last month (~CNY6.3250).  

Second, the Reserve Bank of New Zealand provided a dovish hold for investors, and the New Zealand dollar fell to the its lowest level since January 10 (~$0.7175). The central bank pushed out further when its expects to reach its inflation target (now late 2020, a two-year delay) and shaved its GDP forecast. This signals that policy may be on hold longer than the market previously expected. The strength of the New Zealand dollar (~5% on a trade-weighted basis in the past 2.5 months) was unexpected, but the central bank continues to expect it to weaken.