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China trade plunges in November, Bank of Canada decision up next

Chinese flag against Hong Kong skyline

Having seen another lacklustre and negative session for European and US markets yesterday there appears very little interest to drive markets higher in the short term, as we look ahead to next week’s central bank meetings from the US Federal Reserve, as well as the European Central Bank and Bank of England.

While US markets finished lower for the fourth day in succession, oil prices also fell sharply over concerns that a stickier inflation outlook increases the prospect of a weaker economy heading into 2023. 

Asia markets have been mixed today, with the latest China trade data pointing to the damage the country’s zero-Covid strategy is doing to its economy. It doesn’t seem that long ago that markets were getting excited over the prospect that China was looking at options to reopen its economy, and while we are seeing a more pragmatic approach, any rebound in economic activity is likely to be muted at best. This is because with the onset of winter and China’s Covid strategy, any significant loosening is unlikely to happen much before the end of Q1 next year.

Recent economic numbers also point to a deep malaise, not only in the Chinese economy but more globally. Even as the Chinese economy has underperformed domestically, the exports part of the equation had until recently been performing well. Unfortunately, even here we are now starting to see weakness as global consumers cut back on higher prices, and a weaker economic outlook.

The October China trade numbers showed the extent which China’s zero-Covid policy is having on its economy, as imports declined -0.7%, showing once again that internal demand remains weak. What was especially surprising was a complete collapse in exports, which had been expected to remain resilient after rising 4.5% in September. In October, exports declined -0.3%, which was the worst performance this year, as well as the worst performance in two and a half years. The surprise slump also speaks to falling global demand for Chinese goods, as well as the continued disruption in supply chains caused by China’s zero-Covid curbs.

This effect was confirmed in today’s November trade numbers, with exports plunging -8.7%, as overseas demand slowed and shutdowns impacted economic output, while imports were even worse, plunging -10.6%. It’s perhaps not surprising with numbers like this, that the Chinese government realise a change of tack in its Covid policy is required.

Later today we have the latest rate decision from the Bank of Canada, where expectations are for another 50bps rate hike, although one should be careful not to discount a lesser move of 25bps. When they last met at the end of October, they surprised the markets with a 50bps rate hike, which was less than the 75bps that had originally been priced in. Could they surprise again with a lesser hike?

The surprise decision last month followed on from a similar move a few weeks earlier from the Reserve Bank of Australia, who also decided on a lower-than-expected move, with many asking the question as to what the common denominator around this more cautious approach was. In the case of these two economies, one doesn’t have to look to far, as concerns rise that overly aggressive rate rises could do more harm than good, particularly when it comes to their respective housing markets. The fragility of Canada’s housing market is well known, and has been showing signs of strain as mortgage demand starts to show signs of buckling under the strain of higher rates.

Inflation in Canada has started to come down, with October prices coming in unchanged at 6.9%, while further declines in oil prices should also translate into weaker numbers in the coming months. That’s not to say we won’t see another 50bps rate hike today, although some are suggesting we might see a 25bps move. What we can be sure of is that the days of 75bps moves are probably in the rear-view mirror for now. Jobs growth has continued to be resilient and wage growth is trending at 5.6%, with the Bank of Canada predicting inflation won’t fall back to 3% by the end of next year.  

EUR/USD – has continued to drift away from the 1.0600 area, potentially heading back towards the 1.0400 area and the 200-day SMA, which currently sits at the 1.0340/50 area.

GBP/USD – continues to drift back from the 1.2300 area, with the next key support at 1.2050 area. A move through the 1.2040 area could see further weakness towards the 1.1985 area on a move below the 200-day SMA. 

EUR/GBP – seems that we might have found short term support just above the 200-day SMA and the 0.8540 area. Short squeeze could see a move back to the 0.8675 area. Below 0.8530 targets 0.8480.

USD/JPY – has continued to try and push higher, with a break above the 137.50 area targeting a move back to the 140.00 area.  The rebound from below the 200-day SMA at 134.40 with a bullish daily candle, could signal a short term base.

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