There is growing speculation that China will formally lower its growth target early next month when the National People’s Congress meets in Beijing.
It is China’s impressive growth numbers that have always caught the headlines, together with its comparative resilience during the financial crisis.
But there have always been numerous more worrying issues bubbling just below the surface, such as the environmental costs, over-investment and the fact that inequality has been growing rapidly.At the same time, wages’ growth is becoming a problem, something that is difficult to see retreating given that growth in the labour force has flattened out and is likely to be declining in the coming years.
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There are also issues around initiating a soft and controlled landing of the property sector, not an easy task by any means. So, the magic 8% number may on the way out, but it’s not going to be easy for China to balance all these competing needs and risks.
Yen primarily a rates story. The yen has continued to weaken since last week’s surprise move from the BoJ, but it’s not simply a result of the BoJ’s decision to further expand its bond-buying program. The best explanatory factor behind the move in USD/JPY we’ve seen over the past week is the divergence between their respective 2Y swap rates. While yen rates have fallen US rates have risen, even though the Fed further pledged to keep rates on hold at its latest meeting. So the US 2Y swap has added 9bp so far this month, a pretty notable move in a near-zero rate environment. Furthermore, the yen equivalent has shed a more modest 2bp. This is notable given that USD/JPY’s sensitivity to short-term rate spreads is at the highest level for nine months, using the 1mth rolling correlation between USD/JPY and the spread on 2Y swap rates. Thus the premium of US 2Y rates over Japan is now at the highest level for six months. Of course, there are wider issues for the yen, such as dwindling current account surpluses together with the ever-present impact of the lower domestic savings that this brings. Many have been hurt by taking a bearish stance on the yen in an environment of global risk-aversion over recent years. This is likely to remain a risk, given the continued high level of uncertainty around events in Europe, but near-term it is dollar rates that are proving to be the dominant force in pushing the yen lower.
Sterling hurled lower. After the more dovish BoE minutes yesterday, sterling continued to soften, breaking below the 1.57 level against the dollar, marking a new low for the year vs. the single currency. The main surprise was that two members of the Monetary Policy Committee voted for a GBP 75bln increase in bond purchases under the Bank’s QE program. The extent of the sterling reaction reflects the fact that markets were wrong-footed, thinking that, if anything, the Bank was perhaps a bit more cautious about the need for further stimulus. The need for a greater dose of quantitative easing from those that voted for it (Miles and Posen), stemmed from the view of greater spare capacity in the economy than generally envisaged, together with the risk of a “prolonged period of depressed demand”. As we’ve seen before, especially in the US, there have been false dawns along the road since the 2008-09 downturn and the Bank of England appears to be preferring caution, not least because of the continued risks surrounding events in the eurozone. This is the correct approach in our view because recoveries from balance sheet-recessions, which involve deleveraging by either the corporate, household or government sectors (or a combination thereof), tend to take longer than nearly everyone expects.
The potential hit from political instability in Australia. In the wake of former PM Rudd’s resignation as foreign minister, little surprise to see that current PM Gillard has called a leadership ballot. Clearly, the Labour Party is fracturing, and at a time when the polls suggest that many will lose their seats at the next election. It is a very difficult time for the party. It may like Gillard, but she is unpopular with the public and would almost certainly condemn the party to electoral defeat. Rudd has much better standing with the electorate, but he has burned a lot of bridges within the party. Ultimately, electability is usually what counts in these situations. If the Labour Party chooses Rudd, then it might be facing an election a lot sooner than it bargained for, one that current polls suggest it would lose handsomely. Also, if Rudd is victorious, it is unlikely to do the currency any favours. He has some previous form in that he pushed hard for the introduction of a mining tax back in 2010 that was both surprising and roundly criticised by the large mining companies. In the near term, there is considerable potential for a bumpier time for the AUD given the likelihood of significant political instability.