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China Holds the Key to Risk FX

Last updated 10/21/2009 4:16 AM ET (GMT -5) 3 Comments

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Boris Schlossberg

Director of Currency Research, GFT

The most important economic data in G-10 FX this week may come from China rather than any of the advanced industrialized nations. Tomorrow China will report its GDP,  Industrial Production and Retail Sales figures at 2:00 GMT and the results could have a major impact on the risk trade in FX.

Market consensus is calling for Chinese GDP for Q3 to have risen to 9.0% from 7.9% the period prior, Retail Sales to have increased slightly to 15.% from 15.4% pace in Q2 and Industrial Production to have jumped to 13.3% from 12.3%. Market rumors that Chinese Industrial Production will actually print at 14.1% rate  have already sparked a mini rally in risk FX tonight with AUD/USD rising back towards the .9300 and euro breaking above the 1.4950 barrier.

China remains the absolute key to the recovery trade as it has now becomes the locomotive for global growth. Although its GDP is only one third as large as that of the  US , the pace of Chinese economic growth  plus the sheer potential size of its market makes China the leader of global growth at this time. While US remains mired in  a deep recession as unemployment approaches double digits Chinese domestic demand continues to expand strongly. Last month auto sales in China passed the one million per month mark.

If Chinese data does surprise to the upside it could prove to be the catalyst for further gains in high beta FX. The EUR/USD has struggled over the past several days as option barriers at the 1.5000 level have so far repelled any and all attempts to penetrate it. However, should Chinese data surprise to the upside the 1.5000 figure is very likely to fall as risk appetite will explode.

On the other hand, even a small disappointment in the numbers  could prove to be lethal to the recovery trade bulls. With risk FX priced to perfection and European data beginning to show signs of slowdown as higher exchange rates begin to weigh on the region  any miss could trigger a sharp correction in risk. As we noted yesterday, the greatest danger lies in the commdollar currencies of Asia Pacific which are very closely tied to Chinese demand.  Today, New Zealand credit card spending contracted for the 10 ^th month out of the past 11 indicating that consumer demand remains fragile despite recovery in economic activity. With Aussie and kiwi hovering near yearly highs any deviation from consensus in Chinese data could trigger a sharp profit taking decline.

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Comments (3)

hsbc

October 21, 2009 at 04:52 AM ET

9.1% gdp

Liverpinguin

October 21, 2009 at 11:47 AM ET

Hi Boris, is the number of industrial production already known, +14.1%??

bschlossberg

October 21, 2009 at 12:07 PM ET

That's the rumor. Tonight we'll see the confirmation

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.