China’s August “data dump” has come in ahead of expectations, solidifying the view activity in the world’s second-largest economy is beginning to stabilise. As a result, that’s helped to relieve pressure on the Chinese yuan and its G10 FX proxy, the Australian dollar.
Looking briefly at the data, retail sales and industrial output breezed past expectations, rising 4.6% and 4.5% respectively from a year earlier. Markets were looking for smaller increases of 3% and 3.9% over the year. Urban fixed asset investment was marginally weaker than forecast, expanding 3.2% in the first eight months of the year relative to a year earlier, down a tenth on forecast.
The improved performance from retail sales and industrial production follows a string of fiscal and monetary support measures from Chinese policymakers, the latest being a 50 basis point cut to the reserve requirement ratio (RRR) for banks and a 20 basis point reduction to the PBOC’s 14-day reverse repo rate early Friday. That will release cash to be lent to the real economy while simultaneously helping to lower short-term wholesale borrowing costs for lenders.
In the wake of the data, the Chinese yuan has strengthened against the US dollar with USD/CNH retesting support located around 7.2700, solidifying the uptrend break that occurred on Wednesday. As discussed earlier this week, it suggests the pair may face a period of consolidation or potentially a trend change.
Looking at the preferred China-proxy play for many traders – the Australian dollar – it too has enjoyed the rare reprieve from China negativity, rising against most pairs including the Japanese yen.
AUD/JPY sits in an uptrend within an uptrend, performing well given the difficult macro environment. As a former proxy of global investor risk appetite, many who have been around markets long enough would have assumed it would be under pressure. But not so, as the daily chart reveals. It’s trending nicely, finding renewed gusto on Friday on the back of the data dump.
Continuing to bounce off uptrend support, it’s broken resistance that had capped gains since June, pushing to multi-week highs today. While some may be willing to go long now, pullbacks towards uptrend support, with a stop underneath, improve the risk-reward for the trade.