As China awaits President Trump’s next move in the ongoing trade war, economic indicators due on Friday at 02:00 GMT will provide the latest look at the strength of industrial output, retail sales and fixed-asset investment in the world’s second largest economy. While export growth has so far remained resilient in the face of higher import tariffs by the US, there are signs the escalating trade dispute is weighing on Chinese business confidence. This is reflected in the yuan and the Australian dollar as both currencies have suffered heavy losses over the past six months.
Trade figures released last week showed export growth, while easing slightly from the prior month, maintained descent momentum in August, at 9.8% year-on-year. More importantly, China’s trade surplus with the United States hit a fresh monthly record of $31.1 billion. Although front-loading of orders before the next round of $200 billion worth of tariffs come into force may have contributed to the strong showing in August, there is little evidence that President Trump’s tariffs are having a significant impact on Chinese exports.
However, the simmering trade tensions have dented business and investor sentiment considerably, with China’s main stock indices losing about 20% of their value in the year-to-date and touching 31-month lows this week. The Chinese yuan has also succumbed to selling pressure and is down more than 5% against the US dollar this year. An even better indicator than the yuan to China’s woes is the Australian dollar, which is considered to be a liquid proxy for the fixed yuan due to Australia’s large commodity exports to China. The aussie has fallen by almost 9% against the US dollar so far this year as investors adjust to a period of prolonged uncertainty from trade frictions.
With market sentiment in a fragile state on the possibility of an imminent announcement of fresh tariffs by the US, the aussie could see some volatility to Friday’s releases if there’s any signs of weakness in the data. Analysts aren’t predicting a major change though, as all three indicators are expected to hold at the prior month’s levels. Industrial output is forecast to have risen at an annual rate of 6% in August for the third straight month, while growth in fixed-asset investment is expected to stay at the record low rate of 5.5% year-on-year between January-August. Retail sales, which until recently had maintained double digit growth, are forecast to have increased by 8.8% y/y in August.
Having touched a 2½-year low of $0.7083 this week, the aussie could seek initial support around $0.7150 should it slip on worse-than-expected figures. Failure to hold above this support would risk a test of the 2½-year low $0.7083, which if breached, would clear the way for the $0.70 handle.
Alternatively, a better-than-expected set of numbers could provide the markets a temporary respite from trade concerns and relieve some pressure on Chinese assets and the Australian currency. The aussie could break above immediate resistance at the $0.72 level from a data beat, though a big positive surprise is unlikely. However, sharper gains are possible should there be any evidence in the data that the recent stimulus measures undertaken by Chinese authorities are beginning to cushion the economy from Trump’s tariff threats. The aussie could rally towards the $0.7230 and $0.7260 resistance levels in such a scenario.
