Forex Blog

Earlier this morning, China reported a slew of economic data that shows that their economy is still cranking along at a healthy clip.  GDP figures bested estimates of 9.4% growth, coming in at 9.8%.  CPI data came in lower at 4.6% matching expectations, though PPI data came in slightly higher than expected posting a rise of 5.9% vs. an expectation of 5.7%.  These GDP figures are nearly THREE times the expected GDP of other major economies and exemplify the fact that China is driving the global recovery without a doubt.

So there is major concern around the globe that these figures may be too robust.  In other words China may be growing too much too fast to be sustainable.  They have already made attempts to slowdown their growth by trying to curtail lending, but the issue of the currency peg and closed markets makes it harder for them to achieve balance.  While this is currently a problem, it is a better problem than being broke like the US.

However, if China does decide to slow the pace of their growth (and they may have no choice in the matter), then that could have negative effects on those economies that benefit the most from Chinese growth, like Australia and New Zealand.

This sentiment is not lost on the market, as the commodity currencies and Yen are noticeably weaker this morning.  This leaves the Dollar, Pound, and Euro as the destination for money flows.  For all the talk of the Chinese Yuan peg to the Dollar, wouldn’t it be interesting if the Dollar actually rose in response to the need for a stronger Yuan, and not the other way around?   You heard it here first.

In the forex market:

Aussie (AUD):   The Aussie is lower on sentiment that a Chinese slowdown will greatly affect the economy as China is the biggest importer of Australian raw materials.  Less demand= fewer exports.  Pretty simple math; and Asian stocks were down overnight as a result.

Kiwi (NZD):  The Kiwi is also lower for the same reasons as the Aussie, although additional pressure is apparent as CPI data came in slightly lower than expected, showing a rise of 4% vs. an expectation of 4.1%.  This may mean that the RBNZ can pause on rates for some time, though 4% inflation seems a bit high to me.  (Click chart to enlarge)

Loonie (CAD):   The Loonie is mostly lower as well, though trading higher vs. the Pac Rim currencies, as the potential Chinese slowdown will affect demand for commodities.  As such, both gold and oil are trading lower this morning.  One bit of good news for Canada is that an index of leading economic indicators came in better than expected.

Euro (EUR):   The Euro is higher against all but the Dollar, as money flows are making their way out of the more speculative currencies.   Adding to Euro strength is the fact that PPI figures came in higher than expected, showing signs of inflation creeping into the region’s largest economy.  (Click chart to enlarge)

Pound (GBP):   The Pound is mostly higher on the back of the Chinese data so money is re-allocating itself to various currencies.  The UK is reporting retail sales figures tomorrow and next week’s BOE rate policy meeting minutes will determine if there is any commitment to battling inflation.

Dollar (USD):   The Dollar is stronger across the board as there is bit of safe haven allocation going on, and better than expected initial jobless claims figures (404K vs. 420K) are a step in the right direction.  Later this morning existing home sales will show if there is any life to the US housing market.

Yen (JPY):   The Yen is weaker across the board as the safe haven play has shifted toward the US dollar and the Japanese stock market has sold off after the news of China’s economic growth.

As China goes, so does the global economy.  Yesterday I had mentioned that better than expected figures could be positive for the Pac Rim and commodity currencies.  Clearly today, that sentiment has been proven wrong.  The market assumes that these figures are unsustainable and therefore the only possible outcome could be a slowdown.

Well I am here to tell you that there could be an alternative.  Just because everyone thinks that China should slow down, doesn’t mean they will.  Let’s face it; they have been growing at a break-neck pace for the last 5 years, so why should anything be different now?

While they have taken minor steps to make it appear that they want to temper growth, my gut tells me that they are perfectly happy on their current path.  What people fail to remember is that this is a Communist country socially, and a quasi-capitalist society economically.  While inflation is a problem for their citizens, they have amassed such a war-chest of currency reserves that they could subsidize that inflation for some time.

Until governments around the globe band together and force China to change, I have my doubts that it ever will.  In the meantime, they will continue to get stronger economically, and the rest of the world will suffer as a result.

So in my opinion, the market has it wrong today.  And while the market doesn’t care about my opinion, as a trader I prefer to believe my own eyes and not the story that is being sold to me.  Only time will tell how this plays out, so keep a close eye on this story as it plays out.

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