Therefore G10 currencies will be much more affected by this week’s Chinese economic reports, which also happen to be the last set of economic data before the November 8th leadership change. We all know that the Chinese economy has been slowing and this week we will find out exactly how much. Since China has been the sole source of growth throughout the financial crisis and into Europe’s sovereign debt crisis, the simultaneous slowdown in China, U.S. and Europe has meant a slower recovery in countries around the world. How the Chinese economy is doing is almost just as important as how the U.S. and European economies are faring and for some countries, even more so.
Chinese Economy Expected to Grow at Slowest Pace in 10 YearsRisk appetite in the FX and equity markets have been hanging by a thread so if this week’s economic reports show that the Chinese economy performed worse than expected, the sell-off in global equities and high beta currencies could deepen. Trade, inflation, industrial production and retail sales figures are all scheduled for release this week but the most important report will be the quarterly GDP numbers. The Chinese economy is expected to have expanded by 7.4% in Q3, the slowest pace in more than a decade. In the event of even weaker GDP growth, the Australian and New Zealand dollars will be hit the hardest while the U.S. dollar and Japanese Yen will benefit significantly from safe haven demand. This means that bad Chinese data could drag all of the major currencies lower including EUR/USD, GBP/USD and USD/JPY.
There is not much room for an upside surprise since the Chinese economy grew by 7.6% in Q2 and if the data shows the economy growing at a faster pace, everyone will think that China is cooking the books. Nonetheless should the economy expand by 7.5% or better, we should see a relief rally in the FX and equity markets as investors and central bankers around the world breathe easier. More specifically, this means stronger Chinese economic data should drive currency pairs such as the AUD/USD, NZD/USD and EUR/USD higher as safe haven flows ease out of the U.S. dollar and Japanese Yen.