China’s GDP growth duly slowed to a ‘mere’ 9.1% on an annual basis in Q3. Industrial production picked up to 13.8%, retail sales to 17.7%. It is hard to interpret these figures as anything other than an orderly slowdown, but already policy-makers are sounding more relaxed about inflation and warnings about the risk of a trade deficit next year should be read in the context of FX policy. China’s policy-makers coming off the brakes would be a positive sign for global risk assets, and that day is getting closer. We will be looking for Asian FX weakness as a chance to buy though the buying is definitely for another day, as right now we are in danger of sliding back to risk aversion in a significant way.
Hopes that the weekend’s G20 Finance Ministers and Central Bankers’ meeting would result in more haste to get a ‘save the euro’ package agreed by next week were dashed by downbeat comments from Germany yesterday. EUR/USD was repelled at 1.3920 and with the mood darkening, short euro positions much lighter and relative rates moving in the wrong direction, the bounce from EUR/USD 1.3150 seems complete and a fall back to 1.31 likely.
Today’s data comes in the form of UK CPI, German ZEW and US PPI and TIC data. There will be a focus also on US equity earnings, particularly from the financial sector. The UK data will show CPI inflation nudging up close to 5% and that will make for some bad headlines, in the light of the MPC decision to increase asset purchases. Personally, I see the inflation data as a further blow to spending power, testimony to structural resistance of many prices to the economic cycle, but certainly not a reason for the MPC to hold back from easy policy. Still, the outcome will be downward pressure on GBP/USD to match potential EUR/USD weakness. ZEW probably held steady and is of poor quality indicator, while US PPI will certainly matter less than earnings data. On which note, VIX bounced off support last night, and SPX has failed on the upside, both of which suggest that the USD/CAD correction from 1.0650 to 1.0050 is complete.
Societe Generale
Research & Analytics