Monday’s data releases will be key for commodity currencies, with a particular focus on China. There has been some doubt recently that the world’s second largest economy can power through the effects of tariffs. Which is crucial for currencies from countries that export significantly to China, such as Japan and Australia. Given Canada’s move to export more oil beyond the US, China being the largest importer for oil makes it an important factor for the CAD.
The main issue for forex is whether China will keep importing as much if its economy falters. While GDP growth has remained relatively solid, there are some worrying signs of internal demand. And one important way to measure economic activity and demand is through inflation. CPI changes can not only provide a more accurate diagnostic of the economy, but can also provide some advance warning of a slowdown.
What We’re Looking For
As an economy normally accelerates, it needs more money in circulation. That expanded monetary base coupled with strong consumer demand typically translates into higher inflation. This is why central banks raise rates in an effort to “cool” the economy as a way of controlling inflation.
The flip side is if inflation remains low, it’s usually a sign of a stagnant or slowing economy. Deflation can have a doubling effect on slowing down economic activity. If money is increasing in value instead of decreasing, then there is more motivation for people to save. That saving means less spending, and so the economy slows down. On the other hand, low inflation means that the government has more room to spend more in order to get the economy going.
Lifting the Global Economy
Usually central banks lower rates to stimulate borrowing which is intended to accelerate demand. But the government can intervene more directly through deficit spending. If inflation is low, then the Chinese central government has more room to provide stimulus, which could increase demand for imported goods. This is why forex traders are particularly interested in tracking Chinese inflation, even if trading the Yuan isn’t attractive.
China has already done significant amounts of stimulus. But, we’re still waiting on an expected cut of the RRR, which is the PBOC’s equivalent of lowering interest rates. More government spending packages and measures to ease borrowing have been speculated as well.
What the Data Says
China is in a near deflationary cycle at the moment, which would normally prompt central banks to cut drastically. May China CPI is expected to come in at 0.0%, down from 0.1% prior. But the annual rate is projected to fall to -0.2% from -0.1%. These figures will be reported on Monday, along with PPI. Producer prices are seen providing increased deflationary pressure at -2.6% compared to -2.7% a month ago.
A couple of hours later, China’s trade balance will be released. Its surplus is expected to shrink to $70 billion from $96 billion a month prior. Both imports and exports are projected to shrink. But exports are seen falling by -3.0%, while imports are expected to fall -3.0%. This could be an indicator that the trade war is finally starting to take its toll.
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I’m curious whether the recent tariffs are a bigger factor in dampening internal demand than domestic policy issues. Could we see fiscal stimulus from China targeted more toward consumer spending rather than the usual infrastructure-heavy approach?