Strange reasons to cheer China

January 19, 2016

So, here is the thing. The headlines on China are not that market friendly, slowest quarterly growth since 2009, or slowest growth for the year as a whole in 25 years. Yes equity markets have rallied strongly, shaking off the negative sentiment that has cloaked them for most of the year to date. One reason put forward is the expectation of Chinese stimulus. So China is in a funk because of the huge debt built up in 2008 onwards as it fought off the effects of the global financial crisis, but markets are excited because China may instigate stimulus to counteract slowdown fears. That can only mean more rate cuts or reductions in the required reserve ratio for banks. There is also scope for the currency to take some of the strain, but not yet, given the recent developments and especially on the off-shore yuan. Some of the trends of the year so far in currencies have unwound as a result, most notably the strength in the yen reversing taking USDJPY back towards the 118.00 level. Other moves have been more reluctant to unwind, such as weakness in sterling which largely remains in place, cable having displayed a very weak bounce from the 1.4250 level towards 1.43 overnight. More notable has been the reversal in USDCAD, which up to now has not seen a down day for all of this year as it has moved from 1.38 to 1.4650.

Sterling will remain in focus today with the release of UK CPI data at 09:30 GMT, where the headline rate is seen rising from 0.1% to 0.2%, the core rate seen steady at 1.2%. Sterling has clearly taken a battering for most of the year, so could be vulnerable to a short squeeze on firmer than expected data. Final data for the Eurozone is also seen at 10:00 GMT (expected steady at 0.2%). Both the ECB and BoE are expecting headline inflation to rise substantially in the early months of 2016 as the effects of the fall in energy prices a year ago fall out of the calculation (base effects, as they are called), but for both this rise is likely to be less than expected given the latest oil price developments.

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