FX Daily: Remember The China Risk Factor?

Deteriorating political ties between Beijing and Western economies, along with further signs of a crackdown on Chinese tech companies, have caused a sell-off in Chinese equities, and a risk-off environment to start the week. This could help USD (UUP) stay supported into the FOMC on Wednesday, while German IFO should be no game-changer for the EUR (FXE). 

American and Chinese flags and USA dollars

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USD: Focus on China before the FOMC

US equities rebounded strongly last week and closed at record highs on Friday. In the Asian session, gains in Japanese stocks were more than offset by a sharp drop in China’s equity indices, which looks set to negatively impact Western risk assets today. The cause is the further deterioration in China’s relationship with some Western economies, in particular the UK and US, paired with Beijing's ongoing crackdown on tech companies. The British government is reportedly about to remove China’s CNG from all future power plants, signalling a harder line by the UK on China’s economic influence. Meanwhile, some high-level China-US talks in Tianjin have started on a somewhat confrontational tone, with Chinese officials saying the ties with the US are at a “stalemate”.

China will likely remain a key focus for markets at the start of a week that sees the FOMC meeting on Wednesday as the key event (here is our FX Week Ahead preview). Tomorrow, as the IMF will publish updated forecasts for the world economy, it will be interesting to see whether there will be some downgrade to the Chinese growth forecasts. Any further hits to China-related sentiment (either through the geopolitical channel or the growth expectations channel) should prove beneficial for USD heading into the FOMC meeting, especially versus high-beta currencies and the highly exposed AUD (FXA) and NZD.

For today, the data calendar is light in the US, with some focus only on the Dallas Fed Manufacturing Activity index, which is expected to have inched higher in July.

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Disclaimer: This publication has been prepared by the Economic and Financial Analysis Division of ING Bank N.V. (“ING”) solely for information purposes without regard to any ...

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