Chinese data on April’s fixed asset investment, industrial production and retail sales will be made public on Tuesday at 0200 GMT. Meanwhile, the aussie, which is widely viewed as a liquid proxy for China’s economy, will also be in focus as the numbers hit the markets. The currency is currently attempting a recovery versus the greenback after touching an 11-month low in the week that preceded.
Retail sales and fixed asset investment in urban areas are projected to have marginally eased in the year to April, growing by 10.0% and 7.4% respectively, versus March’s corresponding figures of 10.1% and 7.5%. Industrial production, on the other hand, is forecast to grow by 6.3% y/y, a faster pace compared to the previous month’s 6.0%.
The Chinese government has set a target for annual GDP growth to stand around 6.5% in 2018, the same as in 2017 when actual growth exceeded expectations to come in at 6.9%. One of the factors, though, contributing to a stronger expansion in the previous year was record-high bank lending. Policymakers, however, have vowed to clamp down on excessive lending, that has the capacity to fuel a credit bubble, in an effort to shift focus on the quality of growth rather than merely the quantity. In this respect, the above data might be negatively affected on the face of reduced loan availabilty. In the bigger picture though, such a deceleration is long-term positive so long as it minimizes the risks of a widespread credit crisis.
Turning to reaction in the FX markets, besides the yuan, the aussie will also be gathering attention as the abovementioned numbers go public. The Australian currency is seen by investors as a liquid proxy for China’s economy due to the close economic ties between China and Australia – the former is the latter’s largest export and import partner. Focusing on aussie/dollar, the pair came close to 0.74 last week, its lowest since June last year. It subsequently posted some gains and is currently trading roughly 150 pips above last week’s low. Strong readings out of China might allow the pair to extend its recovery.
A positive surprise in the figures could spur long aussie/dollar positions, with resistance to advances potentially coming around the 23.6% Fibonacci retracement level of the January 26 to May 9 downleg at 0.7581 – the region around this point also includes the 0.76 round figure. In case of a break to the upside, an additional barrier might be formed around the 38.2% Fibonacci mark at 0.7687. Notice that the area around this level also includes the current level of the 50-day moving average at 0.7676, as well as the 0.77 handle.
Conversely, a data miss might spur selling pressure in AUDUSD. Support to losses could initially come from the 0.75 round figure, with steeper losses starting to increasingly turn the attention to Wednesday’s 11-month low of 0.7410.
Lastly, trade developments cannot be taken out of the equation. Overall, China seems to be indeed rebalancing into an economy that increasingly relies on domestic demand, however economic activity remains largely driven by export growth. A threat to this are trade disputes between the US and China. On this front, it is encouraging that President Trump ordered the US Commerce Department to help Chinese telecommunications giant ZTE to get back into business. This comes a few weeks after the company was forced to suspend its operations as the Commerce Department banned US companies from selling it components on the back of “egregious” behavior. Moreover, Chinese Vice Premier Liu He is anticipated to be in Washington this week for more trade talks.
If discussions between the world’s two largest economies turn out to be fruitful, deviating from the narrative of protectionism, then risk assets are likely to attract funds. The aussie dollar is one of the currencies standing to gain due to Australia’s status as a major commodity exporter; barriers to trade can weigh on the currency and vice versa. Also of importance for aussie traders as the week unfolds, is the release of Australian data on employment on Thursday, while tomorrow the RBA will publish the minutes pertaining to its latest monetary policy meeting.
