FYI | Oct 10 2012
By Chris Tedder, Research Analyst FOREX.com
Investors continued to poor into safe haven assets in Asia as investors remain on edge about the future of global growth. Dominating the headlines in Asia is the Chinese growth slowdown, in particular the ability of officials in Beijing to prevent a hard landing of the world’s second largest economy. Whilst this is not a new story, recent earnings reports and economic figures, both from within China and from its major trading partners, cast doubts over previous assumptions that economic growth in China would finally start to head in the right direction this quarter.
China is not looking great, but is this really new news?
What do the figures tell us? The limited amount of data coming out of China doesn’t look great. In fact, the combination of relatively tight monetary policy and weak levels of global demand is a toxic mix for China. Manufacturing PMI data remains in contraction territory and industrial profits are being hit hard. Hence, calls for Beijing to step up to the plate and address the growth slowdown are intensifying. But it’s not that simple for policy makers. Beijing has to consider the implications of said policy, particularly on inflation and house prices, whilst also preparing for a power handover. The end result is that monetary policy may have to take a back seat to politics, assuming the global growth outlook doesn’t fall of a cliff.
What does this mean for policy? We have stressed numerous times that Beijing has both the will and the ability to take care of its own. However, the PBoC and other officials run on their own timetable, so markets may have to wait longer than they would ideally want to.
More weak economic data out of Australia
This slowdown in China is reverberating throughout the Australian economy, a point that RBA Governor Stevens reiterated in his last policy announcement and an important reason why many investors and analysts are predicting the RBA will loosen policy again in November. Yet, we previously pointed to the lack of feed-through we are seeing into the real economy from the RBA’s recent moves. For instance, despite the RBA’s most recent cut to the official cash rate, consumer confidence data released today still showed that pessimists outweigh optimists. If this was a one off we may be able to put it down to negative sentiment coming from overseas and the fact that it took a while for the banks to pass the rate cut onto mortgage holders, but other domestic data also hasn’t picked up as a result of the 150 bps the RBA has lobbed off the official cash rate since October last year. Hence, the market is looking for the RBA to continue its loosening cycle.
Price action
The aussie proved to be relatively resilient during the session, especially when compared with the kiwi and the euro. Both of the latter currencies fell victim to an early round of USD buying and failed to recover. AUDUSD, however, managed to recover later in the session. The euro was likely victim to the lack of progress that emerged from the ECOFIN meetings in Europe and the non-event that was German Chancellor Merkel’s and Greek PM Samaras’s meeting. Overall, the tone in the markets was risk-off, but the lack of headline news or announcements may have saved risk currencies from falling further.
Data watch
Nordic countries will be in focus with industrial production data due in Sweden and September CPI due in Norway.
Republished with permission from the publisher. The views expressed are the author's and not by association FNArena's.
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