China is on a week-long national holiday, but the events going on are of such significance that they are still affecting the market. Analysts are hotly debating the implications for the markets. Which by extension means that Forex could be affected not just when China returns from its holiday, but through the rest of the year and beyond.
Last week, various Chinese government agencies announced a series of massive China stimulus initiatives that were the most aggressive since the pandemic. This caused an impressive rally in stocks, with equities posting the strongest daily and weekly gains since 2008. That sets a relatively high bar in terms of performance, so now the question is whether China has turned over a new leaf or this will once again fizzle.
Why It Matters
There are two main components to the measures announced by China. The one that is pushing the stock market is the combined promise of cutting interest rates drastically as part of the China stimulus, and reforming rules so that hedge funds and brokers can access more capital and are better able to invest in stocks. Chinese equities had been falling for about three years now, making them attractively priced. The influx of capital could help push up Chinese indices. But, the stock market isn’t the economy.
The second prong related to easing restrictions on housing in certain major cities, reducing borrowing costs to buy houses, and providing material support for building companies. This, of course, had an impact on stocks because the shares of homebuilders shot up. But, it has a more direct connection to the Chinese economy, because many people in China use housing as a store of value. Improvements in the housing market would be expected to unleash domestic spending. Also, housing uses a lot of the sorts of raw materials that China imports from places like Australia and South Africa, such as copper, iron ore, and energy.
Will It Last?
It’s not the first time that China has announced stimulus measures, and it’s not even the first time it cut the interest rate. Past attempts to boost the economy have led to a short-lived revival which ultimately faded after a few weeks or a couple of months. But, there is a difference in magnitude and target. This drive is much bigger and broader than past initiatives. And prior initiatives had largely focused on boosting new sectors of the economy and not providing substantial support to the housing industry.
Some of the announcements haven’t even been implemented yet. Naturally, many analysts are debating the short and long term impact of the measures. Many are not picking a side, but simply urging caution, saying it’s too soon to know what will happen.
What Are the Impacts?
If the stimulus measures work, a rebound in the Chinese economy could certainly ramp up demand for commodity currencies, supporting the AUD, NZD, CAD and the Yen. On the other hand, gold could suffer as Chinese citizens turn back to housing as a store of value. A revitalized Chinese economy would also likely increase demand for crude.
Despite China being away for holidays, and therefore news being somewhat scant, we can get some indicators. US-listed stocks of Chinese companies faded some of the gains, as American investors remain a bit uncertain about the long-term effects of the policy. But Hong Kong (which doesn’t celebrate the week-long Golden Week holiday) has seen its China-based shares continue the rally. The opportunity for a major change has been established, but the mass of key economic data coming out of China after its holidays end on Tuesday could be the real test to see whether it’s a new trend or a new fizz.
Trading the news requires access to extensive market research – and that’s what we do best.
The post What Impact Does China’s Surge Have on Forex? appeared first on Orbex Forex Trading Blog.
