While many traders may be a little disconnected from reality and push equity markets higher while selected currency pairs remain stuck in their overextended trends which is a very unhealthy combination and equity traders as well as forex traders need to be aware of this. Most market participants remain high on the drugs provided by central banks and fail to understand that a tremendous asset bubble has been created.
Economic data released out of China shows a severe slowdown in lending by Chinese banks. New Yuan loans slowed down to CNY482.5 billion in December. The slowdown is even more severe than economists have expected who called for a slowdown to CNY570.0 billion. While banks slam on the brakes the Chinese economy is likely to feel the impact with slower consumer demand as the People’s Bank of China is fighting inflation.
A slowdown in China will send ripple effects throughout the Asia-Pacific region and the Australian Dollar may witness the biggest impact from this and drift lower until it tests support levels. The New Zealand Dollar will feel less of an impact which makes the AUDNZD currency pair an interesting trade.
Continuing with economic disappointments, Germany reported GDP expansion for 2013 at 0.4%, below the 0.5% expected and trailing 2012’s 0.7% rise. This shows that the overall global economy may have been much weaker than traders have hoped for. Economic data for January may continue to point towards a much weaker economy than equity markets suggest.
Last Friday’s non-farm payroll report out of the US offered the biggest disappointment on the economic front and traders took it as a positive which brings us back to 2007-2008 where good economic news were good and drove markets higher and pushed the forex market into prolonged trends and bad economic news had the same effect. The result was a severe global financial crisis and a 50%+ correction.