Worries over potential tighter policy out of China are likely to increase volatility and initiate a much needed correction in both equity markets as well as currency markets. Plenty of traders have ignored the wrath of negative news on the economy and pushed financial markets higher without facing a correction in over two years.
China has been stumbling along and growing just enough to not spark greater concern, but new calls predict a contraction in the Chinese manufacturing sector which would have widespread negative economic implementations.
According to news reports Chinese banks have tripled their debt write-offs which sparked selling and resulted in a broader market sell-off across Asia which transferred into Europe and the US. The Japanese Yen gained strength as traders flock to safe havens amid uncertainty.
An increase in inflationary pressures in China has also many traders worried that China will tighten its policy in order to reduce liquidity and fight off inflationary pressures. This is a much welcomed policy stance to take as China is aiming for long-term sustainable growth rather than short-term policies without long lasting effect as the likes of the US is promoting.
The US Dollar has sold off yesterday amid a non-farm payroll report which suggests that the Us Federal Reserve will not taper its quantitative easing which is US Dollar negative. Forex traders should not expect the USD to correct without bumps in the road and yesterday presented plenty of opportunities to buy the USD short-term.
The NZDUSD already corrected over 150 pips and could extend an additional 200 pips and back into very solid support levels. Overall the NZDUSD should advance and mark higher highs as early as January when the debt ceiling debate will once again loom over the markets.
China will continue to execute policies designed for long-term growth and never subsides to market pressures who would like China to make the same mistakes Japan and the US have made. Market participants should expect a minor contraction in the manufacturing sector which could lead Chinese GDP down to 7.0%.
The outlook for the USD overall remains weak for the foreseeable future, but a minor counter-trend rally should be anticipated by currency traders at which point buying the dips in all currency pairs who have the USD as a quote currency is recommended.