China Jitters Offset by US GDP Surprise     

• Last week, global equities and particularly commodity markets shuddered at the prospect that China's central bank may take away what is beginning to look like a bubbly punch bowl in China's economy and financial markets, prompting the People's Bank of China spokesmen to assure investors gave that they had no intention of doing anything dramatic.
• Chinese regulators have however ordered banks to ensure that unprecedented volumes of new loans are channeled into the real economy and not diverted into equity or real estate markets where officials say fresh asset bubbles are forming. New government policy requires banks to monitor how their loans are spent and comes amid warnings that banks ignored basic lending standards in the first half of 2009.
• China concerns however are being ameliorated by an increasing number of observers of the US economy confidently predicting that the US economy is "getting better" and that the end of the recession is in sight. The pleasant surprise in the US Q2 GDP futhered this notion.
• Japan's equity market continues to mirror trading in the S&P 500 literally tick by tick, as record unemployment and domestic consumer and corporate price declines strongly imply that domestic demand in Japan will be very anemic for as far as the eye can see. In other words, it's all about external demand for Japan right now, and incrementally better news about the US economy has investors looking at still-weak Japanese corporate earnings results as a cup half full instead of half empty.
• While there are widespread calls for an appreciation in JPY to 85/USD by the end of 2009, we believe the exact opposite may be more likely. Prior highs in JPY came amidst a climate of a global financial crisis and rapidly deteriorating global trade. In other words, the more dire the financial system and global economy seems, the stronger the upward pressure on JPY. Thus its reputation as a "haven" currency.
• Consequently, more positive surprises like Q2 US GDP will, however mild, actually push JPY in the other direction, to JPY100/USD or perhaps weaker.

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