On Thursday, all eyes will be on China’s July trade balance as traders gauge the impact of Trump’s trade war and the outlook for the global economy. China’s imports are, of course, vital for the Australian economy so the Aussie could be affected. But other countries rely heavily on trade with China, meaning the data could have a ripple effect around the world. The yen, NZD and even the CAD could see some effects as well.
China is still in the midst of negotiating tariff levels with the US, separate from the mass global trade levies that could come into effect at the end of the week. But, China is facing tariffs of 30%, the third highest after the recent hike on Canada and Brazil. The US is also China’s largest trade partner. So, the effects of the trade war should be clearly visible in Chinese data, and that could give traders some insight into how the global economy is going to respond.
What to Look Out For
The consensus among analysts is that China’s July trade surplus will increase to $117.7 billion from $114.8 billion a year ago. That’s worrying, particularly for Australia, because it’s seen as a result of rising exports but falling imports. Iron ore prices have been hovering near $100/ton as the market frets about China’s economic growth and demand.
China’s July exports are expected to increase at a 5.1% annual rate, which is a bit slower than the 5.8% reported a month earlier. Imports, on the other hand, are expected to reverse course. Products entering China are expected to fall by 1.3% instead of increasing by 1.1% as they did a month earlier. This could mean that China’s economy is slowing, meaning less demand for imports.
Bad News is Good News?
What could affect the market reaction to the data is that China has been trying to prop up its domestic economy through large government spending programs. These have intensified as China faces tariffs from its largest buyer, the US. Trump is threatening further tariff increases against China to try to dissuade it from buying Russian and Iranian oil. China is the largest oil importer and the largest customer for both Russia and Iran.
If the trade data is representative of slowing internal demand, then that could mean that the Chinese government will increase stimulus measures. Which means that the “bad” news could cause a positive reaction in the markets. On the other hand, if trade activity remains robust, then that could mean there is less pressure to stimulate the economy.
Getting the Ball Rolling
Markets have been in a risk-off pattern for most of the first half of the year, as investors worry that the trade war will cause the economy to slow down. This has helped gold rise, as well as strengthen the yen and weaken the dollar.
But if the global economy continues to show signs of strength, then that trend could reverse over the course of the next few months. Strong Chinese trade data could be added to the expansion of the US economy in Q2 as signs that the global economy might still forge ahead despite tariffs.
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