By almost everyone else's measure growth at 8.9% y/y in Q3 would be an opportunity to break open the champagne, but this number was not quite strong enough to match expectations for Chinese expansion in the third quarter. Disappointment on the back of this numbers this morning was sufficient to bring risk appetite off the boil, to support the USD and rein in the NZD and the AUD.
But with China still easily on course for achieving growth of 8% to 8.5% this year, perhaps more important than this morning's GDP print are signs of a sea change in opinion over Chinese loose policy position.
Not long ago the market was anxious for confirmation that loose fiscal policy would be maintained in order to keep the global recovery in track and risk appetite underpinned. Now there are increasing worries that loose conditions could be sowing the seeds of an asset bubble within China. As a consequence, calls for a tightening in monetary policy in China are building. Already there is consensus that Chinese policy should be oriented towards boosting Chinese domestic demand in order to correct global imbalances, this may be achieved by a firmer exchange rate. This topic is likely to receive even greater attention now that EUR/USD has touched the elusive 1.5000 level and the USD index is back to 14 month lows. Comments from Eurozone officials over the past month or so have made it clear that they are worried about the EUR bearing the brunt of the downward adjustment in the USD. This appears to be reference to the 'undervalued' CNY. The topic of China's exchange rate can be expected to get increased attention in the approach to the next G-20 meeting. That said, the Europeans have a carefully line to trend. While it is feasible that Chinese policy will be a key topic in upcoming G-20 meetings further oral communication from the Eurozone in support of the US Treasury's strong USD policy will likely be needed to ensure further rises in EUR/USD remain orderly. EUR/USD broke below 1.500 following the release of Chinese data this morning reaching a low of 1.4944 in European hours.
The session turned sour for the pound following the release of much weaker than expected UK retail sales data for Sep. These came in flat compared with a median expectation of +0.5% m/m which had been supported by positive survey data. Today's poor number puts the risk of an increase in QE firmly back on the table for November and therefore counters the more positive inferences which were drawn from yesterday's MPC minutes and recent comments from BoE officials. Friday's Q3 GDP data could be key in fine tuning expectations for QE ahead of the Nov MPC. Cable slid below 1.6500 before finding buyers, EUR/GBP moved back towards 0.9070 before sterling found support.
Overnight data from Japan showed a worse than expected Sep trade surplus of Y520.b bln but a slowing in the pace of exports decline due largely to better demand from China. Data also confirmed stronger than expected demand from Japanese investors for overseas assets and lower demand for Japanese assets from overseas in the week to Oct 17 consistent with the recent rise in risk appetite. EUR/JPY failed to hold its best levels this morning given the general move away from risk.
Canadian retail sales and monetary policy report, US initial sales and leading indicators are all due this afternoon. Comments from Fed officials may also be key.
