Markets Cheer China Data But Fed Comments May Sour Sentiment

The sentiment-linked Australian and New Zealand Dollars outperformed while funding currencies like the Euro, Franc and Japanese Yen traded lower as risk appetite firmed in Asian trade. The move appeared to reflect carry-over from an upbeat day on Wall Street, where benchmark S&P 500 index posted the largest gain in nine sessions.

The chipper mood was bolstered by an upbeat set of Chinese trade figures. In Yuan terms, exports unexpectedly grew 2.3 percent year-on-year in December. Economists forecast a 4.1 percent decline ahead of the release. Cross-border sales fell in US Dollar terms, but the reported drop of 1.4 percent was far smaller than the 8 percent drawdown projected by analysts.

Looking ahead, another round of commentary from Federal Reserve officials is in focus. Chicago and Boston Fed Presidents Charles Evans and Eric Rosengren will comment on the outlook for growth and monetary policy. Evans represented the dovish end of the voting bloc on the 2015 FOMC, a role he hands of to Rosengren this year.

With that in mind, their comments may serve as a baseline for the rest of the committee. Indeed, if Evans and Rosengren foresee 3-4 rate hikes in 2016, this seems to imply the average Fed view is significantly more hawkish than prevailing market bets. Such a scenario is likely to prove broadly supportive for the US Dollar and but may rekindle risk aversion. An upbeat tone in the Fed’s Beige Book survey of regional economic conditions may amplify this dynamic.

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