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China’s Slightly Slowing the Q1 GDP

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Tuesday’s release of the Q1 GDP figures from China are seen as a bellwether for the global economy. By extension, that could affect most of the major currencies as investors try to pre-position ahead of potential economic shifts through the summer. The Asian giant is the first major country to report its results from the first three months of the year, and can be an indication of where markets are heading.

For the optimists, though, the outlook could be a bit disappointing. China is still the world’s largest export center, with demand from Chinese-made goods seen as a strong indicator of consumer demand among developed countries. The slowdown in Chinese exports is seen as a negative sign for prolonged economic growth. By extension, this could hurt commodity currencies that supply the raw materials to Chinese factories.

What to Look Out For

China’s Q1 GDP is expected to show an annualized growth of 4.6%, a significant slowdown from the 5.0% reported in the final quarter of last year. Although this doesn’t mean the government’s growth target is out of reach, it does signal there are obstacles to get there. On the flip side, this underperformance could be seen increasing pressure on the PBOC in particular to step up stimulus for the economy.

The point of contention for the commodity currencies is the housing market. Housing requires a lot of raw materials, and with the housing market in dire straits, imports have been subdued. However, Chinese authorities have consistently refused to provide major support for this sector, and support in other areas isn’t trickling into the construction industry. China stepping up support for the economy might end up benefiting commodity exporting currencies, which could counterintuitively perform better if the Chinese economy does not.

The Outlook Beyond

Although the first quarter is expected to be a step back for China, the consensus for now is that the economy will pick back up in the second quarter. But if the Q1 GDP substantially disappoints, then economists could reevaluate that outlook and the lack of optimism could end up supporting safe havens. The dollar is already getting a boost on expectations the US economy will outperform this year, and disappointing Chinese data would likely affirm that narrative

On the other hand, if China manages to pull out increased growth in the first quarter despite the economic hardship, then this could provide a realignment of investment. We have to remember that at the beginning of the year, the Chinese stock markets fell substantially. Those funds were moved over in large part to Japan, where the Nikkei returned to an all-time high for the first time in three decades. A stronger result in China could end up hurting the yen, due to a return in outflows.

And The Other Countries?

Chinese lack of activity is seen as a sign of underlying issues in its trade partner’s consumer segments, particularly in Europe. China is EuroZone’s largest trade partner, and underperformance in the Chinese market would likely weigh on the Euro.

But overperformance in the Asian giant could get market bulls to take on more risk in general. It appears that market participants are looking for excuses to push equities higher around the world. That means safe havens could underperform as risk assets increase due to expectations that other major economies will also see better than expected results.

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