The world’s largest manufacturing economy continues to show resilience despite geopolitical turmoil weighing on the outlook for other nations. There are two important data releases next week that are particularly relevant to commodity currencies: First is the trade balance, as traders seek insight into China’s demand dynamics. Next is Chinese inflation data, which provides important insight into the country’s economic performance and the central government’s capacity to stimulate demand with stimulus spending.
Commodity currencies remain sensitive to the Asian Giant’s economic performance, as they rely on raw-material exports amid faltering economic conditions. China’s growing trade surplus and unsteady domestic demand pose significant challenges for commodity currencies. The AUD in particular could be at risk, given overcapacity in steel in copper that is dragging on Chinese heavy industry.
Commodity Demand At Risk
An important takeaway from PMI figures earlier this week is that smaller export companies were outperforming larger heavy industry. This is particularly concerning for commodity currencies, as the large state-owned enterprises that the NBS tracks are the larger importers of raw materials.
On the other hand, as China works to mitigate the effects of the trade war with the US and the shooting war in the Middle East, which restricts energy flows, it continues to commit to raw material purchases. Softer economic data could have a counterintuitive effect on currencies, as it raises the chance that the central government will step in with stimulus spending.
What the Market is Looking For
First up is China’s May trade balance, which comes out on Tuesday. The consensus is for the nation’s trade surplus to increase modestly to $89.0 billion from $84.8 billion in April. The surplus had been impacted by rising fuel costs, which led imports to increase by 25% compared to a year ago. However, a 14% rise in exports helped offset the impact. China is a major hub for fuel refining, and the interruption in demand raised prices for Chinese distillate exports. Australia is one of the buyers of Chinese refined crude, with higher prices offsetting the income generated from iron ore and other commodity exports.
On Wednesday, China releases its May CPI data, which is expected to show a monthly rate of 0.0%, with the annual rate accelerating modestly to 1.4% from 1.2% a month earlier. Sluggish economic growth has weighed on consumer prices amid weak domestic demand. However, PPI is expected to accelerate to 3.1% from 2.8% due to higher energy costs. This rising inflationary pressure could crimp the central government’s ability to deficit spend to boost the economy.
How the Market Might React
Overall, a larger trade balance, aided by rising imports, would likely be bullish for commodity currencies, with the AUD a particularly strong beneficiary. On the other hand, weaker data, such as a smaller surplus or slowing export figures, could suggest that China might buy less raw materials in the future, weighing on consumer currencies.
As for inflation, the market still expects the PBOC to remain on an easing path, but if consumer prices accelerate, those odds could diminish. A higher inflation reading would likely weigh on commodity currencies as it reduces the chance for stimulus.
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