-Chinese inflation dropped to 1.8% y/y, which marks the lowest reading since last July when consumer price inflation hit 6.5%. Low inflation by itself is not positive if it reflects low demand in the economy, but since it leaves greater room to manoeuvre for the central bank it is perceived as positive. With industrial production at its lowest level since 2009, growing 9.2% y/y in July, the road should be paved for further stimulus.
-The price of copper, which is probably still one of the best market indicators on Chinese growth expectations, is slightly up overnight and generally copper has been range-trading since its June low. The Chinese data in combination with a decent Australian labour market report allowed for a spike above 1.06 in AUD/USD. Momentum is nearing stretched level and suggest waiting, but looking beyond the short and medium term we remain ‘structural’ AUD bullish. Note also that Australian data since May on average has delivered more positive surprises than New Zealand data, which explains AUD/NZD above 1.30.
-For the bigger markets it is still a period of wait-and-see as the data calendar remains light and as there is still no clarity on whether Spain will ask the EFSF to activate a bond purchase program. This naturally leaves the question of whether we are at risk of seeing a market correction in this interim period - and which currencies would be most at risk. From a technical perspective, momentum in the euro crosses is not yet looking stretched, though EUR/USD and EUR/GBP is near 1 SD on our preferred daily momentum indicator.
-The Scandies continue to perform strongly and have even gained more than 1% against the euro since EUR/USD bottomed out on July 24. In fact, the Scandies have only been outperformed by the cyclical EM currencies such as HUF, PLN, ZAR and RUB. The strong Scandie performance sounds almost too good to be true, as the SEK and NOK gained on rising euro risks and now gains on improved risk sentiment. Relative rates are, however, supporting the move lower in EUR/SEK and EUR/NOK which should act to slightly lower the risk of a correction. We would not add to long Scandie positions at these levels.