Safe-haven FX Gains as Weak China Data Sparks Global Growth Concerns

Key Points

• Safe-haven currencies including the US dollar and yen outperformed on Monday on a day dominated by China/global growth worries.
• Chinese industrial production, retail sales and fixed asset investment disappointed across the board, prompting a concerned PBoC to cut rates.
• The Aussie, kiwi and loonie underperformed, ahead of a busy week of data/central bank events for each.

Dollar, Yen Gains Amid Safe-haven FX Demand

Safe haven currencies gained on Monday in a day dominated by concerns about global growth prospects following ugly economic activity data out of China overnight. The yen was the best performing G10 currency, while the US dollar was the second strongest, with the US Dollar Index gaining 0.8% and rallying to the 106.50 area, taking it back above its levels prior to last week’s softer than expected US Consumer and Producer Price Inflation figures for July. USD/JPY fell 0.1% to remain in the low 133.00s.

Chinese Industrial Production, Retail Sales, and Fixed Asset Investment grew at a much slower than expected annual pace in July, sparking concerns about the recovery in the world’s second-largest economy following a series of stop-start lockdowns in the first half of the year. China’s central bank, the People’s Bank of China or PBoC, unexpectedly cut interest rates for a second time this year in order to boost domestic growth, signaling that authorities in China are concerned about recent economic developments.

Currency market participants now turn their focus to a busy week of G10 economic data releases/central bank events. From a macro perspective, the main focus will be on Wednesday’s US Retail Sales figures for July and the minutes of last month’s Fed meeting. The former will provide a timely update into the health of the inflation-hit US consumer, while the latter will give further insight into the Fed’s appetite for further monetary tightening in wake of recent hawkish commentary regarding the need for more rate hikes from Fed policymakers as of late.

Aussie, Kiwi, Loonie Lose Out as Risk-sensitive FX Tumbles

Despite growth fears delivering a boost to US equities via hopes that the US Federal Reserve might adopt a less aggressive stance on monetary tightening in the coming quarters, risk-sensitive currencies in the G10 like the Aussie, kiwi and loonie lost ground on Monday, with each dipping over 1.0% versus the buck. Australia and New Zealand are highly exposed to a slowdown in Chinese growth given China’s importance as one of their major export destinations, whilst the loonie was hit amid a sharp decline in global oil prices on demand outlook concerns.

While global macro factors will remain in the driving seat for all three currencies this week, traders will also be keeping an eye on a barrage of domestic data releases/economic events. Out of Australia, the RBA releases the minutes of its last policy meeting on Tuesday, Wage Price Index figures that could impact the likelihood of another 50 bps rate hike at the RBA’s next meeting are out on Wednesday and jobs figures for July are out on Thursday.

In New Zealand, the RBNZ are expected to lift interest rates by 50 bps on Wednesday to 3.0% and signal further tightening ahead. In Canada, meanwhile, July CPI data that might impact near-term BoC tightening expectations is released on Tuesday ahead of Retail Sales figures for July on Friday.

Elsewhere in the G10, sterling dropped 0.7% versus the buck on Monday while the euro was last down about 1.0%. The euro underperformed sterling on reports that Germany’s top network regulator said that the country will need to reduce gas usage by one-fifth this winter in order to avoid rationing.

Traders of both currencies will also be closely watching a busy domestic economic data calendar this week. Out of the UK, July CPI data is released on Wednesday ahead of July Retail Sales figures on Friday. Out of the Eurozone, flash Q2 GDP growth figures are set for release, alongside preliminary HICP inflation numbers for the first half of August.