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Forex: Chinese deflationary pressure

Overnight we’ve seen the Chinese rate of inflation fall to a five year low and once again this is further evidence that deflationary pressures from the substantial declines in the price of oil are filtering through. CPI month on month has dipped into negative territory and in respect of wholesale prices they were also lower than expected marking nearly 3 years of deflation. This is more evidence of a Chinese economy that is coming off the boil and yesterday the Yuan suffered quite a move to the downside although it is recouping some of those losses against USD this morning. Investors remain worried that China’s growth next year, which is pencilled in at around 7%, will be lower but there is the flip side to the coin of lower oil prices that will act as a stimulus to the Chinese economy, just as it will to the wider global economy. As business and consumer costs continue to fall this means more room to invest and 7% growth for an economy as large as China’s is certainly not insignificant. Its significance however makes it a real threat to the global economy should the debt bubble burst and cause Chinese growth to tumble.

The other threat causing concern for investors is the political tensions in Greece as Presidential elections are called for next week. Despite the Greek stock index suffering its worst daily declines in 27 years the euro has held up well with EURUSD just below 1.2400 this morning. This situation will be very closely monitored going forward. On the economic data front today the calendar is light however keep an eye on the Aussie overnight as employment data is released.

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