Daily Sources 2/11

1. Kevin Hamlin at Bloomberg reports that Chinese exports fell by an annualized rate of 17.5% in January while imports fell 43.1% as per the customs office.

"'It’s a very eye-catching trade surplus [of $39.1 billion] and people will ask how it can be so high at a time that everybody else’s economy is suffering,' said Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd in Hong Kong. 'What’s happening here is really dramatic, underscoring plunging global demand.'"

Brad Setser at Follow the Money notes that historically the correlation between Korean, Japanese, and Taiwanese exports to China and Chinese exports to the rest of the world have been tight. Given that the correlation continues, Setser and CFR colleague Paul Swartz drew up a graph demonstrating that the future looks bleak:



Setser concludes:

"In some sense, it is hard to imagine a worse combination. China’s export are falling, making China understandably reluctant to allow its currency to appreciate. But China’s trade surplus is also rising … certainly in nominal terms and quite possibly in real terms. … At a time when the world is short demand, China seems to be subtracting from global demand not adding to it."

Meanwhile, Yves Smith at Naked Capitalism speculated yesterday that the recent email response by former adviser to the People's Bank of China Yu Yongding to Bloomberg reporter questions that suggests the US should guarantee Beijing's holdings of US sovereign debt represents the government view.Yves comments:

"What is weird is this particular threat is empty. Stop buying Treasuries? Great! The dollar will tank (which is what the Fed should want, the 40% depreciation of the dollar in 1934 played a major role in reviving the US economy) which would hurt China export competitiveness (Stephen Roach, a Morgan Stanley economist who now heads their Asian operations, contends that China needs to devalue its currency. It thus needs to buy even more dollar assets to effect that).

Or this may simply be an effort to blow smoke. 'We want assurances you won't weaken the dollar because it will hurt our FX reserves.' That is one way of dismissing Tim Geither's demand that China quit manipulating its currency, and the result would be that the dollar would fall relative to the yuan.

So this broadside seems either to be a retort to US demands ('you want us to let the yuan rise? Not unless you improve the quality of the guarantees on the paper we hold') or part of a long-term effort to move towards a new currency regime (China resents the way the US has abused its reserve currency standing, and also wants a fixed price currency regime, seeing that as producing more stability, which in turn is more conducive to trade)."

Although Smith's characterization of a non-government official response to an emailed query by a wire reporter as a "demand" seems, well, a tad wound up, I think that at this moment in time there are likely more than a few governments who suspect that Beijing's putative notion of fixed currency regimes would indeed ensure more stability and thus better encourage trade.



As you can see from the graph above, many governments with currencies clearly tied to the fate of oil printed prodigious amounts in order to prevent appreciation and, so I infer, inflation. The reserves so acquired have not been enough to really halt the reverse slide, however. (This is not true of some of the currencies in the Middle East--for example the Saudi riyal--though their foreign exchange reserves must be coming under pressure, even given a shallower market. The situation appears to have been aggravated in Russia by the recipients of government largess using said largess to short the ruble.)

2. Daniel Pimlott and Peter Garnham at the Financial Times report that Bank of England governor Mervyn King said the bank will probably begin quantitative easing next month as the UK economy is in deep recession.

"He was speaking as the Bank unveiled its latest inflation report that suggested inflation will fall to 0.5% and may remain well below the Bank’s 2% target for much of 2010 and 2011."

Quantitative easing is defined a creating money with which to purchase assets. The Bank of England expects the economy to contract throughout 2009, hitting a low of -4% in the second quarter.

3. Bruno Waterfield at the UK Telegraph reports that the paper has been given access to a confidential European Commission document which was discussed by EU finance ministers yesterday warned that estimates of asset writedowns by European banks are large relative to GDP of EU member states.

"In line with the risk, and the weak performance of some EU economies compared to others, investors are demanding increasingly higher interest to lend to countries such as Italy instead of Germany. Ministers and officials fear that the process could lead to vicious spiral that threatens to tear both the euro and the EU apart."

(h/t Jesse's Café Américain.)

4. Christopher E. Smith at the Oil & Gas Journal reports that the Wintershall Chairman, Reinier Zwitserloot, told the CERA conference in Houston yesterday that the likelihood of completing the Nord Stream natural gas pipeline was 100%.

"The Nabucco pipeline could be built, Zwitserloot allowed, but the only realistic supply source is Iran. Gas from Turkmenistan is not crossing the Caspian, he said. It will go instead either to Russia or Iran. Azerbaijani supplies could reach Europe, but that is by no means certain; 'so, your choices for gas from the region are either Iraq or Iran,' Zwitserloot said.

Additional gas from Russia will have to be part of the path forward and will require additional infrastructure. 'The Yamal system is full, full, full,' said Zwitserloot. 'The system through the Ukraine is in very bad condition even without the political problems and will require large investments just to keep capacity from shrinking year by year.' Nord Stream should therefore be seen not as an alternative or bypass route but as a needed additional path for energy supplies to reach Europe, he said."

BASF oil and gas division Wintershall has a 20% stake in Nord Stream, Gazprom holds 51%, E.On Ruhrgas 20%, and NV Nederlandse Gasunie 9%.

5. Upstream Online reports that the Canadian statistics office today posted the country's first trade deficit in 33 years.

"Exports to the US--which takes around 75% of all Canada's exports--dropped by 10%.

'With the real deficit widening as well, Canada's trade sector remains a drag on economic growth,' said Derek Holt and Karen Cordes of Scotia Capital Research.

Finance Minister Jim Flaherty said the deficit was partly due to past strength of the Canadian dollar, but that recent weakness in the currency should help the situation.

'It has a lot to do with the currency,' he told reporters. 'The dollar has adjusted. It will make a difference going forward.'"

6. Garth Theunissen and Paul Okolo at Bloomberg report that interbank currency trading has halted in Nigeria after the central bank there mandated that all foreign exchanges banks are unable to sell within five days of its acquisition must be handed over to the central bank. The central bank also prohibited the banks from buying or selling currencies for more than a 1% price differential from which it auctions dollars to commercial lenders.

"Foreign exchange 'shall be for the use of customers and shall not be used for inter-bank transactions,' the central bank said in a statement on its Web site. It also prohibited banks from buying and selling foreign currency at levels diverging by more than one percent from the rate it auctions dollars to commercial lenders.

'They’ve effectively banned their interbank currency trading market,' Hugman said in a telephone interview. 'This places significant restrictions on the interbank foreign-exchange market.'"

In early December the Nigerian central bank limited sales of US dollars to $100 million from the sales being seen at that time of $800 million (see Daily Sources 12/4 #10.)

7. John Kingston at the Barrel reports that at the CERA meeting in Houston this week, analyst James Placke described the upcoming Iraqi bidding round as "very, very, onerous"--"The Iraqis set the targets, they control the operations and the companies pay the bills." Another CERA analyst, Andy Barrett, thought that 2009 Iraqi production would average around 1.9 mb/d, as against Placke's forecast of 2.3-2.4 mb/d and Platt's estimate of 2.3 mb/d.

8. Walter Pincus at the Washington Post reports that on Monday the Krygyz Parliament decided to delay voting on President Kurmanbek Bakiyev's decision to shut the Manas base until Russia provides the $450 million in aid and loans Moscow promised in a recent meeting.

9. Salman Masood at the New York Times writes that a Pakistani government report was leaked to local television networks allowed that at least 5 of the 10 gunmen in the Mumbai attacks were from Pakistan.

"But officials here have rejected India’s assertions that the assault was conceived and planned inside Pakistan. According to the television networks, the government report says that investigators have concluded that the attacks were planned in a European country and Dubai over the Internet, and that the planners used Bangladesh for logistical support."

My read is that Islamabad is working to prepare its constituents for closer cooperation with the US and India on this matter.

10. Judy Dempsey at the New York Times reports that Jaap de Hoop Scheffer--the secretary general of NATO--said today that the organization will follow international law as it pursues its new strategy of bombing poppy processing plants in order to deny the Taliban those revenues.

11. John Fund at the Wall Street Journal reports that the outgoing CIA director, Michael Hayden, has told the journalist that Mexico represents the second-largest security threat to the US after al-Qaeda. The Western world--and especially the US--exports instability by targeting supply and not consumption. The other solution is to legalize the offending drugs and regulate their production--unlikely, given the political complications, and a longer road to cutting off the export of political instability, given that the illicit drugs would remain illicit elsewhere.

12. Ethan Bronner and Isabel Kershner at the New York Times report that the election results in Israel basically indicate a draw, with some increase in leverage for the far right. Kadima (left) took the most seats so far with 28. The Likud (right) took 27. Far-right Yisrael Beitenu took 15 seats. Labor (left) took 13. The Arabs took 9. Both Kadima and Likud had indicated that they wanted to include Labor in any governing coalition, but the rise of Yisrael Beitenu suggests a sense of embattled-ness in Israel--a further radicalization.

13. Grant Smith at Bloomberg reports that the IEA today cut its forecast for 2009 oil demand by 570 kb/d to 84.7 mb/d, down 1 mb/d from 85.68 mb/d in 2008. Platts reports that the IEA expects Chinese demand growth to slow to 0.7% in 2009, forecasting demand of 7.92 mb/d in 2009 over 7.86 mb/d in 2008.

14. Shobhana Chandra at Bloomberg reports that US exports in December fell 6%, while imports fell 5.5%. The trade deficit fell 4% to $39.9 billion from November, a smaller change than most economists had expected.

15. The EIA reported today that crude stocks built by 4.7 million barrels in the week ended February 6 to 350.8 million barrels. A Bloomberg survey had analysts expecting a build of 2.75 million barrels. Though well above the historical five year average, the stocks number is still below the numbers seen in July 2007:



Gasoline stocks, however, fell by 2.6 million barrels versus Wall Street expectations of a 500 kb build. Gasoline stocks are now at about the middle of the historical range. Distillate stocks fell by 1 million barrels. Though mixed, the data, taken in isolation, should put downward pressure on prices.