NEWS / Foreign Exchange

Markets get ready for data that may hint at overheating Chinese economy

Markets get ready for Chinese GDP: Fears of a sell-off in Chinese equities, combined with a surge in volatility, could once again lead to JPY strength as carry trades unwind. Today's Chinese GDP data is expected to re-ignite fears of an overheating Chinese economy. In a report released yesterday, the Official Nanfang Daily cited an official with the National Bureau of Statistics saying that the overheating could be as serious as last year. Chinese equity markets are once again trading near new record highs, and look sensitive to profit taking (at the time of writing this the Shanghai index is down by more than 3%). The JPY could be a winner in the event of a big sell-off, as positioning data shows speculators' net shorts on the JPY has now reached the highest level since Feb 27 (the day of the last Chinese sell-off on tightening fears). Spot gold is trading near similar levels seen at the Feb 27 Chinese sell-off, and some suggest we could see short-term profit taking, but underlying bullish fundamentals remain intact.

BoJ rumors give support to the JPY: The JPY firmed during the Asian session, as markets got ready for the Chinese GDP data. BoJ sources told a major news agency that the BoJ will say in an April 27 report that core consumer prices will rise at a faster pace (this was contradicted by BoJ governor Fukui, who reiterated today that core CPI will hover around zero in coming months). There have been some rumors since yesterday that the BOJ will raise rates even in May.

Japanese consumption during Jan-Mar could be stronger than first anticipated: (JP FEB TERTIARY INDUSTRY INDEX MOM: 1.0% V -0.5% expected; Highest level in almost 20yrs, prior revised to 0.4% from 1.6%) Analysts said that early calculations showed that the tertiary sector index rose about 0.7% on average in Jan-Feb from Oct-Dec, showing a clear positive trend. The Japanese services sector employs more than half of the country's workforce, and spending on services is closely tied to changes in income and consumer confidence.

Equities: Asian equities are trading lower as traders take profits ahead of China's GDP data. The Nikkei is currently near session lows, down by more than 1.4%. Declines on the Nikkei are being led by exporters as the JPY strengthens. Consumer finance companies in Japan are lower on a press chatter that Acom and Promise may report greater than expected losses due to increases in loss reserves. The Kospi opened higher to trade at a new record, but the index is currently being weighed down by shares of Samsung and other exporters due to the stronger KRW. The ASX 200 index is lower by 1.0%. Declines on the index are being led by property-related shares and metals companies.

Forex: High yielding currencies were sold and carry trades were reversed ahead of the Chinese GDP data. There was a slight pause in USD selling. Traders who were short the USD took some profits after major levels were taken out. The consensus is that interest rate expectations remain the fundamental driver in this market, but focus on volatility could become the main driver if Chinese GDP came in much stronger than expected. With no major data on the Eurozone calendar today to provide direction, Euro traders will likely focus on recent (hawkish) commentary from the ECB.

Commodities: Spot Gold is trading higher, despite a rise in the USD and a drop in crude oil prices. Currently spot gold is near 11-month highs and above the $694.50 level. Shanghai Copper is sharply lower on declines in the LME contract.