A Notable Soft Spot in Chinese Data

DailyFX

Slightly weaker-than-expected Chinese retail sales data suggests that the country’s ongoing efforts to develop a more consumption-based economic model have yet to take hold.

After a massive move yesterday, currencies have traded quietly early Friday as traders continue to digest the implications of the US budget deal. The economic calendar is essentially barren in both Europe and North America today with the only data of note coming from China.

Chinese economic data printed largely in line with expectations, with GDP coming in at 7.8% as forecast and industrial production increasing at a 10.2% rate versus 10.1% expected. One sour note was the weaker-than-expected retail sales report, which showed a gain of 13.3% versus 13.6% projected. The news was slightly disappointing as the country's efforts to move to a more consumption-based model have yet to materialize.

Many analysts have noted that investment continues to comprise more than 50% of Chinese GDP, and the latest figures simply showed the same old government stimulus forces still at work. Nevertheless, the headline GDP number was relatively robust given the global growth conditions, and with US budget issues resolved for the time being, the hope among investors is that Q4 demand will pick up accordingly.

The Australian dollar (AUD) initially sold off slightly on the Chinese numbers, but eventually recovered to trade back to the day's highs as currency traders saw few red flags in the data. The Aussie was also boosted by a report from Goldman Sachs, which said it expects the Reserve Bank of Australia (RBA) to return to a tightening bias in November 2014. While that may be a long ways off, Australian policymakers remained relatively nonchalant regarding the currency's recent strength.

RBA Governor Glenn Stevens said that he "personally" thought that a lower AUDUSD would be helpful for rebalancing the economy, but the emphasis on personal rather than official policy indicates that at least for now, the RBA is willing to tolerate the pair above the .9500 exchange rate.

Meanwhile, the US dollar (USD) continued to weaken against its major counterparts, with USDJPY hitting session lows by mid-morning London trade, while EURUSD inched towards the key 1.3700 level. With the euro (EUR) so close to yearly highs, the temptation to run stops at that barrier is extremely strong, and the pair will likely try to push through that figure in North American trade.

As we noted yesterday, the one key takeaway from the US budget battle over the past several weeks is that the Federal Reserve is likely to remain accommodative at least until the end of the year, and given that scenario, the dollar will remain under pressure for the time being.

By Boris Schlossberg of BK Asset Management

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