The concerns surrounding China at present are double-pronged. The issue of the build-up of mis-directed and excessive lending over recent years had never been far from the headlines. But there is also the real economy issue, namely to what degree the economy is slowing and how manageable this slowdown is for the authorities. The data releases overnight have brought more concerns on the second front, with industrial productions and retail sales both falling short of expectations. There was a notable impact on FX, with the yen proving to be the main beneficiary and allowing USDJPY to move lower for a third consecutive session. The dollar weakness was also helped by stronger than expected labour market data in Australia, powering the Aussie back above the 0.90 level. For China, the question is whether the authorities are in control of the slowdown, or if it starts controlling them. As the consequences of excess lending start to feed through, the risks of the latter scenario increase. The Chinese Premier was sounding more flexible on the 7.5% growth target overnight, stressing that it is ‘about’ 7.5%. Such comments have increased the perception that the authorities are more concerned and preparing the ground for growth to fall short of expectations.
The other standout in overnight trade had been the single currency. Yesterday’s move above the 1.39 level initially came after comments from German finance minister Schaeuble, but found further support in overnight developments. As we mentioned earlier this week, there are relatively solid signs that China is diversifying currency reserves away from dollars and the single currency is benefitting from this. The 1.40 level is now looking within sights.