China economy continues to look vulnerable

China is the focus of attention at the beginning of this trading week; the Shanghai Composite Index has gained close to 5%, despite further economic data from China highlighting that the economy is looking increasingly vulnerable to dropping below the government’s 7% GDP target before the end of the year.

With the economic data from China largely unconvincing and the economy appearing exposed to entering a deeper downturn to what was previously anticipated, the People’s Bank of China (PBoC) are going to remain under intense pressure to reinvigorate data through further stimulus measures. Declining domestic momentum has been a running theme for at least a year, but the markets would have been alarmed by the export numbers highlighting that there is slowing demand for Chinese goods and that the economy is also exposed to weakness outside of mainland China.

The USD is regaining momentum on the currency markets with the major currency trading higher against the majority of its trading partners after an unexpected period of selling to conclude last week. The USD was oversold on Friday evening and the reason for the sudden profit-taking is unclear after the NFP reiterated that the Federal Reserve should begin raising US interest rates as early as next month. Although the United States might not be adding the star-striking numbers to its economy that it was earlier this year, job creation remains the star performer of the US economy and the employment report last Friday should be considered robust.

I personally don’t understand why the markets are anxious that the Federal Reserve might swerve away from its repeated commitment to begin raising interest rates in 2015, because the economic data from the United States is proving consistent while also raising optimism that the economic recovery over the past year is sustainable. The only question mark I have over the US economy is that we are encountering very little improvement when it comes to improved consumer expenditure and there is hesitation from consumers to spend money. This might also play into the Federal Reserve’s hand though, because reduced consumer spending provides a reason for the central bank to adapt a slow pace to raising US interest rates.

The failure of the EURUSD bulls to close above the psychological 1.10 area has once again limited gains with the pair falling as low as 1.0935 to begin the week. Greece remains a potential risk, meaning that the Euro is still vulnerable to further falls against its trading partners. While the Euro has declined against the USD, it has actually risen against the CHF with the EURCHF climbing to a near six-month high at 1.0764. The Swiss National Bank (SNB) are intervening in the currency markets and I think that the central bank are targeting the EURCHF being positioned around the 1.10 area in the mid-term. With the SNB intervening in the currency markets, the chances are strong that the USDCHF will continue appreciating towards parity. The pair has now advanced by nearly 400 pips to 0.9882 since surpassing the 200 Moving Average that was pinpointed as a buying signal in these market reports just over a month ago.

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