Chinese slowdown means more easing, waiting for the ECB

Forex News and Events

The weak Chinese GDP weighed on market sentiment in the Asian session. Yet, with regional equities indices at such lofty heights, investors did not need much of an excuse to cut risky assets. China’s GDP grew 7.0% y/y in Q1, the slowest pace since 2009. In other data, fixed asset investment (FAI) grew by 13.5% for 1Q compared to 13.9% prior read. Nominal retail sales growth fell to 10.2% y/y (10.9% consensus) in March, against prior read 10.7% y/y. Finally, March Industrial production growth was extremely weak rising only 5.6% y/y against market expectation of 7.0% y/y. Overall, the frail data, combined with other recent reports indicates rising downside risk to growth. We are now seeing soft patch in both domestic demand and external demand (remember those scary export figures).
Consensus for 2015 now stands at 7.0%. The Shanghai composite fell -1.24% while the Hang Seng rose marginally 0.16%. Interestingly, recent soft data has fueled speculation of additional monetary policy easing, driving frenzied asset buying, todays data just scared investors. That said, we do expect the Chinese policymakers to act to support weak growth and defend against deflationary threat in the near term. Alongside current easing measures, the PBoC will use conventional expansion polices, interest rates (25bp cut) and reserve requirement ratio (two 25bp cuts) adjustments are expected.
Not surprisingly the PBoC continues to show the world a strong Yuan as the central bank fixed USDCNY 67pips lower to 6.1340 (USDCNY spot was also lower). We anticipated USDCNY will continue to strengthen despite headwinds. While economic data and monetary policy divergence should pushed USDCNY higher, Chinese authorities aspiration to be included in the IMF’s SDR will keep CNY well supported. On a side note, accorded to the IMF, India is expected to outgrow China for the first time in 16 years.

In the FX market, with China reporting weak growth, AUD came under steady selling pressure. The AUDUSD quickly lost yesterday’s hard fought gains, falling to 0.7590. Traders will be watching 0.7530 support, as a break would extend bearish target to 0.7300. The commodity export weakness, driven by Chinese slowdown, is having profound negative effects on Australia (data showed that consumer confidence fell to 96.2 from 99.5 today). We anticipate that the RBA will further ease monetary policy by 50bp this year. As for the CAD, recent improvement in crude prices has helped the USDCAD regains lost ground. However, weak Canadian data, slow US growth and dovish BoC minutes indicated that additional cuts are still on the table. Traders are not expecting any rate cut at today’s BoC meeting (hold at 0.75%) as the incoming data has not been so extremely negative as to warrant action.
Therefore, the focus will be on any changes to the statement regarding forecasts for GDP growth (possible downside forecast revisions). With crude prices not expected to meaningfully improve (IEA sees OPEC supply growing the most in four years due to Saudi Arabia production increase plus Iran output question), and the threat of more easing, we remain constructive on USDCAD and buy on dips for a move back to 1.2850 highs.