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Week October 14 to 18, A Close Look at China’s Fundamental Data

 

Weekly Overview of FX Rates Movements

The week was driven by the following factors:

  • Solid Chinese economic data including a 7.8% rise in GDP.
  • The end of the debt ceiling debate, at least for now.
  • The expectation by the Fed member Evans that the government shutdown has delayed Fed tapering. San Francisco Fed’s Williams even speaks of a longer time of forward guidance: Reasons are the unemployment rate of 7.3% that is still far above the (for him) natural rate of unemployment of 5.5% and the inflation rate well under 2%.
  • The upcoming debt ceiling debate in January 2014 may delay tapering again.
  • Relatively high U.S. unemployment initial claims (358K vs. 335K expected) and a better than expected Phily Fed manufacturing index.

As a consequence, gold, silver and the risk-on currencies of the Asian bloc, namely AUD, NZD and NOK appreciated, while the dollar weakened. Together with its friends in the Asian bloc, CHF also inched up: USD/CHF depreciated by 1% from 0.9122 one week ago to 0.9021. As usual EUR/CHF followed the weaker USD and fell from 1.2350 to 1.2344 during the week.

 

October 14 to October 18 Movers and Shakers

Fundamental data from China have become main drivers of FX rates. We provide an analysis based of last week’s Chinese “data dump” and try to understand its global implications. This dump contained trade data, inflation data, credit data and GDP. Finally we take a look on the ratio of retail sales to industrial production, an indicator of the “global imbalances”.

Chinese Retail Sales vs. Industrial Production

Chinese Retail Sales vs. Industrial Production - Click to enlarge

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Investment recommendation

Chinese equities remain undervalued compared to other stock markets.

As opposed to some other emerging markets we do not see any Chinese structural weakness, the PPI shows that costs and wage increases are under control. We recommend large Chinese caps (FXI) or alternatively the Guggenheim China Small Cap ETF (HAO).

If global imbalances accentuate again then Chinese exporters will take profit on it and it will be time to increase the share of selected emerging markets again. If these imbalances diminish then the local consumer will become more interesting. A win-win game for Chinese stocks.

 

George Dorgan
George Dorgan (penname) predicted the end of the EUR/CHF peg at the CFA Society and at many occasions on SeekingAlpha.com and on this blog. Several Swiss and international financial advisors support the site. These firms aim to deliver independent advice from the often misleading mainstream of banks and asset managers. George is FinTech entrepreneur, financial author and alternative economist. He speak seven languages fluently.
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