While the market was generally focused on the fallout from the US midterm elections, including a major drop in stocks, commodity currencies have been hit by developments in China. The Aussie is particularly vulnerable to developments in China’s trade surplus, but underlying economic factors can affect the CAD, NZD, and the yen as well.
China is facing a somewhat unique problem, which would normally be seen as a very positive sign: A massive trade surplus. Despite the ongoing trade war as the US and the EU try to contain China’s economic influence, China’s trade has increased significantly compared to a year ago. However, this has not translated into increased domestic economic activity, putting authorities in Beijing in a difficult position. How they resolve the issue is likely to have a major impact on the Aussie, and how the market reacts to China’s upcoming trade data.
Why Is China’s Central Bank Tightening?
Up until recently, the main discussion among traders of commodity currencies centred on when the PBOC would cut rates to support the domestic economy. Beijing has been pulling out all the stops to recover from the housing crisis and boost domestic activity. Strategically, China is trying to move away from being so export-dependent.
However, the rise of AI and the demand for infrastructure have significantly increased Chinese exports, counteracting the measures taken by the Chinese government to “reshore” its economy. Domestically, China is facing an increasing “stagflation” environment. Early on Monday, its headline inflation rate slipped to 0.7% from 0.9%, well below the rates causing consternation at most other central banks. But the PPI rate jumped to 5.7% from 5.0%, indicating rising price pressures on China’s production base.
Why No More Stimulus Hopes?
Earlier, China’s GDP surpassed the lower end of the government’s 4.5-5.0% growth target for the year, prompting many analysts to suggest that the central government won’t implement large fiscal stimulus programs. That view was reinforced by the PBOC’s move to raise the Reserve Requirement Ratio (RRR, or “triple R”), a move equivalent to a rate hike. The intention is to curb the rapid appreciation of the Chinese currency, fueled by rapidly growing exports but sluggish import growth.
The effect was an immediate depreciation of commodity currencies that are liquid proxies for the situation in China, such as the NZD and AUD. The data suggest that internal demand remains weak, implying slower import growth that typically prop up Australia’s and New Zealand’s currencies.
What the Market is Looking for
The trend is expected to continue when China reports its latest trade data on Tuesday. The consensus is that the country’s October trade surplus will expand to $135 billion from $133.5 billion in September. The market will likely focus on whether exports continue to outstrip imports by far.
Over the last ten months, exports have risen 6.7% while imports have improved by just 3.7%. This has generated a record trade imbalance with the West, a negative sign for the Aussie and Kiwi. Unless there is a pick-up in imports, those two commodity currencies could remain under pressure.
