The Chinese Have Set out a Floor

As growth round the world slows some more
The Chinese have set out a floor
Of Seven percent
So they can prevent
The social unrest they abhor

It is shaping up to be another very dull session in the FX markets today as a dearth of news and data combined with the ongoing summer vacation schedule has kept traders on the sidelines. The most interesting news overnight were the newest comments from Chinese Premier Li Keqiang, who has established 7.0% as the floor for growth that is acceptable to the leadership. My reading of the constant changing (lowering) of this ‘target’ is that the growth numbers are falling and they are trying to get ahead of the announcements so they can claim all is well with their programs. What does appear to be ongoing in China is a greater reliance on the domestic consumer and less export focus, but it remains to be seen how long the government there will be willing to go down this path, especially if the employment situation worsens and they find themselves with many millions of unemployed young men. That is their nightmare scenario, and one which they will do anything to avoid, including significant economic pump-priming. As such, we will need to watch the events there with increasing interest. What we do know is that hot money continues to fly out of China, and emerging markets in general, as concerns over slowing growth combine with better opportunities in the developed markets. From an FX perspective, I would expect this activity to support the US Dollar as Treasuries, at their current yields, are the most likely place for capital flows.

As such, it is no surprise that the dollar is marginally stronger this morning against most currencies, but the operative word here is marginally. The biggest mover has been the yen, falling about 0.5% and just getting back to 100.00. The other major currencies are all mere pips from yesterday’s levels and showing no signs of moving. The overnight data showed only that French Business Confidence was a bit better than expected, and later this morning we see Canadian Retail Sales. This is not the stuff that moves markets. So what will be the next driver? My money is on the next comments we get from Bernanke or other Fed members, or perhaps Draghi and his ECB cohorts. With nothing scheduled for today, it appears that we have achieved the very definition of the summer doldrums.

One thing to note has been the decline in currency implied volatilities during the past several weeks. This does represent an opportunity for hedgers who purchase options to take advantage of relatively cheap pricing. But otherwise, look for limited movement for the day. As I wrote yesterday, all eyes are starting to turn toward next Friday’s employment situation report, and we may not see very much activity between now and then.

Good luck