FX MARKETS ARE POWERED BY BEIJING

DIRECTOR OF CURRENCY RESEARCH, GFT

As I prepare for my “all-things-forex” seminar with Allister Heath on 23 September between 8 and 10am at the Grange Hotel (register at gftuk.com/cityam), I can’t help but marvel at the idea that China is now the primary driver of trade in the FX market. Although its own currency is tightly controlled, the Middle Kingdom exerts an immense influence over the free floating currencies of the West as traders look east for direction on global economic growth.

Nothing demonstrates this new dynamic more clearly than this past week-end’s release of monthly Chinese economic data. After Chinese industrial production, retail sales and new loan reports all beat consensus forecasts, the currency markets roared to life on Sunday night pushing euro-US dollar higher by more than 100 points as fears of a global double-dip contraction began to fade and the recovery trade received a second wind.

As China transitions from a mere producer of manufactured goods to a significant consumer in its own right, the world’s second largest economy now influences everything from demand for Australian coal to German machinery goods. In short, China is the new locomotive of the global economy, replacing the US which continues to suffer from the aftereffects of the burst of the housing bubble. If China can maintain GDP growth at 10 per cent or better for the rest of the year, chances of a global economic slowdown become minimal even if the US economy continues to lag.

Although the US is now the understudy on the global economic stage, attention this week will focus squarely on the American economic calendar as traders get a glimpse of the US retail sales, industrial production, weekly jobless claims and University of Michigan sentiment survey. Generally, consensus expectations are for a moderate improvement in all gauges of activity and the data meets or beats forecasts the risk rally could progress throughout the week with euro-US dollar possibly targeting the $1.3000 level while dollar-yen trades to ¥85. In the end, China alone cannot sustain the global recovery and the US must contribute even a modest amount to global growth in order for the risk trade to thrive.

Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary at www.GFTUK.com/commentary or e-mail borisandkathy@gftuk.com.