Over the weekend, China will report its inflation figures for July. Usually, CPI is a key indicator for a currency, but China’s control over the exchange rate means that the market cares more about the secondary effects of this data. As a major importer of raw materials, China’s economic developments have a significant impact on several key commodity currencies.
One of the more vulnerable ones now is the Australian dollar. The sluggish growth in the antipodean nation, which is weighing on the currency, is compounded by geopolitical factors. The greenback has been gaining some footing lately as trade deals get signed. The Japanese yen is also in focus, as Japan is affected by new tariffs and is a key exporter to China. Even the Euro is in the mix, as China is the leading destination for German exports.
Why It Matters
Traders are looking closely at China’s growth indicators to see if it will keep buying massive amounts of raw materials. If it doesn’t, it could cause several major currencies to decline. If exports drop, then demand for the currency to pay for those materials falls as well. Which means that commodity currency traders need to pay close attention to developments in China.
China is projected to grow at a 5.0% rate this year despite the trade war. This is in large part due to a continuation of strong domestic demand, supported by stimulus from the central government. But, government deficit spending typically translates into higher inflation. This would put a limit on how much stimulus is available to the Chinese economy, both in the form of government subsidies and reductions in the central bank interest rate.
What’s Moving Expectations On China
Economists believe that the PBOC will cut interest rates in the final quarter of this year. That would provide substantial support for the economy, including continued imports of raw materials. But, for that to happen, inflation needs to remain low. So far, inflation has been creeping back up over the last few months as the economy reacts to the increased stimulus.
So, if inflation overshoots expectations, then that could leave the market worried that the expected rate cut might not happen. This could leave markets bearish on commodity currencies. On the other hand, a miss of expectations leaves more room for monetary policy easing and increasing stimulus, which should be bullish for countries exporting to China.
What to Look Out For
The consensus is that China’s July headline CPI will fall back to an annual rate of -0.1% from +0.1% in June. But, part of this could be due to base effects, since the monthly rate is expected to accelerate to 0.3% from -0.1% the month before. What’s also going to get attention is the PPI figure, which comes out at the same time. Producer prices are predicted to remain in deflation at -3.2% compared to -3.6% previously.
The deflationary PPI is of concern because it indicates that there could be an oversupply situation in the Chinese economy. This could cause a buildup of inventories, a usual precursor to a recession. So, accelerating PPI growth would likely provide some relief to the markets as well.
