(As written for My Paper on 6 March 2012. Click here to enlarge)
In the strongest signal yet to reduce reliance in exports and capital spending in favour of consumption, China’s Premier Wen Jiabao set the pace for this year’s growth at 7.5%.
The announcement was made yesterday during the state-of-the-nation speech delivered to 3,000 lawmakers at the annual meeting of the National People’s Congress in Beijing.
Since 2004, China has aimed for 8% growth for the last eight years straight. As a recap, GDP growth for 2010 came in at 10.4% while 2011 recorded a growth of 9.2%. While still ahead of the 8% benchmark, the numbers have been steadily dropping the last couple of years.
Inflation figures were also higher than expected last year, recording a figure of 5.4% against a benchmark 4% target. This year, the inflation goal will remain unchanged at 4%.
After Premier Wen’s announcement, the Yuan weakened, sending the USD/RMB exchange rate to 6.3043, its strongest level in four weeks.
Let’s take a quick snapshot on how China has managed its monetary policy recently.
From October 2010 to July 2011, China hiked interest rates five times to contain runaway inflation. However, in a change of course, the government lowered the banks’ reserve requirement ratio by 50 basis points on 30th Nov 2011, the first such cut since 2008. It then followed up with another lowering last month, bringing the reserve requirement ratio to 20.5%.
This reveals China’s intention to inject liquidity and increase the flow of money into the economy to boost lending and sustain growth – amidst a backdrop of slowing exports to Europe.
What are the immediate impacts of China’s slowing growth?
For one, expect Australia’s growth to slow. China imports a hefty amount of raw materials from Australia, and if China slows, Australia is bound to feel the effect.
In fact, the tell-tale signs are already present:
1. A Citigroup Inc. gauge of Australia’s terms of trade for commodities, which measures the price of exports relative to imports, fell 4.6% last month and reached an 18th month low on 1st March 2012.
2. Rio Tinto, the world’s third-largest mining company, may shut its smelter in Australia because of rising costs and declines in prices for the metal.
Top News This Week
1. Australia GDP m/m. Wednesday, 7th March, 8.30am. I expect figures to come in at 0.7% (previous figure was 1%).
2. USA Non-Farm Payroll. Friday, 9th March, 9.30pm. I expect figures to come in below 200K (previous figure was 243K).
Short USD/CHF at 0.9080
On the H4 chart, USD/CHF has been on a steady downtrend, clearing over 640 pips in 6 weeks. Price action looks to be respecting the downtrend line, hence, the bias is for us to go short.
We will place a sell order once prices touch 0.9080. A stop loss of 75 pips is placed above the downtrend line.
We will have 2 targets on this trade, exiting the final position at 0.8940.
Entry Price = 0.9080
Stop Loss = 0.9150
1st Profit = 0.9010
2nd Profit = 0.8940