A quick recap of some numbers out of China this weekend:
- Factory production climbed 10.1 percent in November from a year earlier – 10.1%!
- Retail sales growth accelerated to 14.9 percent – 14.9%!
- The consumer price index rose 2 percent from a year earlier.
- Fixed asset investment excluding rural households in the first 11 months of the year rose 20.7 percent.
- Output of rolled steel rose 16.5 percent in November from a year earlier. (That’s a lot of steel).
- Growth is on track to rebound sharply above 8 percent this quarter.
Wasn’t it just a couple of months ago that the headlines (well….at least those out of the U.S) where riddled with talk of “China’s fall” “China’s Hard Landing” or “The Chinese Economy Derailed” – I think not. The growth engine is chugging right along, and I see absolutely nothing but “sunshine and rainbows” ahead for the Chinese economy.
China is now Australia’s largest export market, with trade worth at least $115 billion a year so continued growth in China should bode well for both Australia and neighboring New Zealand as well commodity rich Canada moving forward.
Companies supplying construction and mining machinery (such as Caterpillar Inc) should also look to do well.
The continued theme of “staying long the commodity currencies” should prove to be a strong strategy in the months ahead.
Riding the China Growth Wave: Strategic Currency Positioning
AUD/USD and NZD/USD: The Primary Beneficiaries
With China’s industrial output surging and steel production jumping 16.5 percent, the Australian dollar stands as the most direct beneficiary in the forex markets. Australia’s economy lives and dies by Chinese demand for iron ore, coal, and agricultural exports. That $115 billion trade relationship isn’t just a number – it’s the foundation for sustained AUD strength. The Reserve Bank of Australia will be watching these Chinese data points closely, as robust demand from their largest trading partner provides the economic cushion needed to maintain hawkish monetary policy.
New Zealand’s dollar follows a similar trajectory, though with slightly different fundamentals. The Kiwi benefits from China’s agricultural imports and growing middle-class consumption patterns. That 14.9 percent retail sales growth in China translates directly into demand for New Zealand’s dairy products, meat, and agricultural commodities. Currency traders should note that NZD/USD often provides better risk-adjusted returns than AUD/USD during Chinese growth cycles, as New Zealand’s smaller economy creates more pronounced currency movements from the same underlying demand shifts.
CAD: The North American Commodity Play
The Canadian dollar represents the cleanest way to play China’s infrastructure boom from North American trading hours. Canada’s vast natural resources – from oil sands to copper mines – feed directly into China’s manufacturing machine. That 10.1 percent factory production growth requires raw materials, and Canada supplies them in abundance. USD/CAD should continue its downward trajectory as Chinese demand supports commodity prices and strengthens Canada’s terms of trade.
Bank of Canada policy makers are undoubtedly pleased with these Chinese numbers. Strong commodity demand provides the economic foundation for potential rate hikes, creating a positive feedback loop for CAD strength. Currency traders should watch WTI crude oil prices and copper futures as leading indicators for CAD direction. When Chinese factory output accelerates, these commodity prices typically follow within weeks, pulling the Canadian dollar higher.
Industrial Metals and Currency Correlations
That massive 16.5 percent surge in steel output tells a bigger story about currency correlations ahead. Steel production requires iron ore, coking coal, and energy inputs – all commodities that drive exchange rates for resource-rich nations. The South African rand, despite its domestic political challenges, often surges when Chinese steel production accelerates. USD/ZAR provides an interesting contrarian play, as rand strength during commodity booms can be explosive but volatile.
Chilean peso exposure through USD/CLP also makes sense in this environment. Chile supplies copper to China’s manufacturing sector, and that 20.7 percent fixed asset investment growth requires tremendous amounts of copper for electrical infrastructure and construction. Currency traders often overlook these secondary commodity currencies, but they can provide outsized returns when China’s growth engine accelerates.
The Dollar Funding Dynamic
Here’s where the strategy gets interesting from a funding perspective. The Federal Reserve’s monetary policy stance looks increasingly dovish compared to the growth dynamics in commodity-exporting nations. This creates a natural carry trade opportunity – borrowing in USD to buy higher-yielding commodity currencies. The growth numbers out of China provide the fundamental backdrop that makes this trade sustainable.
Currency traders should consider structured positions that capture both the commodity currency appreciation and the carry differential. AUD/USD call spreads, CAD strength positions, and even emerging market commodity currencies become more attractive when China’s growth trajectory is clearly established. The key is positioning before the full impact of Chinese demand flows through to commodity prices and central bank policy decisions.
Risk management remains critical, but these Chinese numbers provide the kind of fundamental clarity that makes directional currency bets more straightforward. The growth engine isn’t just chugging along – it’s accelerating, and smart currency positioning can capture significant profits from this China-driven commodity supercycle. Focus on the currencies most directly tied to Chinese industrial demand, maintain proper position sizing, and ride the wave of what looks to be sustained Chinese economic momentum ahead.
I’m looking at AUD/USD to kick off things this week, and silver. The lead up to FOMC should be bullish.
Sounds right on the money Kreks!
Forex Kong,
You talked about leading and lagging indicators. Is one of your premise that forex technical analysis signals (e.g. AUY/USD and AUY/JPY) have a good probability of being leading indicators?
Thanks!
U bet.
It’s nothing new in a broad sense – as risk related currencies such as the AUD are always benifactors of “risk on” activity in general.
What “is” a leading indicator is 100% pure price action – as opposed to some kind of boxed “oscillator” built on moving averages and “lagging” data.
There is no substitution for pure price action in dictating market direction as my charts contain no other boxed / prefab oscillator other than an RSI for the smaller time frames.
Hope it helps!
China Trade data didn’t verify,data is easy MoM due to Oct holiday. Aussie longs are levels not seen since 1993, everyone and their dog is playing the QE Fed this week which was already telegraphed by the WSJ. BTW you have a fan that pointed you out at Ibank coin Fly’s spot fwiw.
Sounds good tradingnymph – with all things considered, I just can’t find a single reason to be anything but long risk here.
I see the dollar rolling over hard here in coming days – and Bernanke money hitting the market just can’t be denied. I don’t like a guy with that many chips sitting across the table from me, and have learned not to push my luck. It all does line up quite “telegraph” here at this point – no doubt. As long as Im on the right side – telegrpah away!
I love the guys over at Ibank and have been avid reader for sometime now. It’s great to hear that anyone from “over there” is also reading here – yourself included!
I hope to get your input here – don’t be a stranger.
Welcome!
Too many on the same side of boat on the risk on trade…normally that means the boat sinks.
I continue to “trade what I see” – until proven otherwise – and will let the markets show me it´s next move.
I will need to see Bernanke’s 85 Billion per month rendered completely and totally ineffective in supporting risk ( which I also believe will happen as subsequent “QE´s” have less and less impact) before I’ll even consider looking short.
As it stands…..this thing is gonna blast higher pronto – and the buck is gonna tank hard – Bernanke style.
Every Algo Program is set up in the same manner, If QE is only source of catalyst, it could get really ugly, really fast. In 2009/2011 we had not just Bernanke, but cordinated moves from the other key central banks.Now, it looks like BoE is tapped out for now (Merv was talking about waiting until late 2013 to even start to see their QE effect), ECB can’t engage OMT until Spain asks, and Spain won’t ask cuz it will mess with bond yields (so imho its a stalemate), BoJ will add stimulus next week imho, so Yen will sell off/if we go risk off then USD is the place to be. China Govt talks about stimulus, but not talking real money.Fed just one part…will be interesting week.
plus Cad got their Nexen boost, but buzzard is open now and Iran behaving…Oil should continue to pull off if that QE is not all that and a bag of chips…85 B may not be enough for a global that is in recession.
In my view – the central banks (now as co ordinated as ever) have already made their choice – to simply print til inflation eventually breaks the back of the average joe – as the can kicking continues. As you’ve outlined – EVENTUALLY it wont work, but I don’t expect that anytime soon – perhaps trading in a range / flat through 2013, and then tanking sometime in 2014.
I have no concern for the algos / rip job in the U.S equities markets, as currencies move in a much broader/slower/ manner – much like turning the wheel of a large ship – the turns can take months (pull the reversal in USD/JPY and note the multi month consolidation – based simply in the fact that the U.S will be forced to raise rates before Japan (if they ever do)).
Again – I trade what I see – and save the “prophecies” for the Maya.
F/X can swing fast and hard, imho Equities (all) are just the tail of the big dog of F/X/bonds/commodities. Trend followers work, until it doesn’t…I would rather understand it, that is the fun part of all of this. USD/JPY move is not all based on that imho, a lot more moving pieces…
The swings are most definitely fast and hard if you are maxed out on leverage, trading ridiculously small time frames – I don’t trade that way as it is a recipe for novice account liquidation.
A difference of opinions most certainly is what “makes a market” as many have different views as to “why” things move in the manner they do. I don’t care so much for the debate, as we all see things differently – more importantly that I/we make money.
Opinions are suggestive of “emotions” – and again – I’ve got no real interest in that…..at least as it pertains to trading.