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- In the past few months, we have seen that the deceleration in the economic activity in China combined with the sharp fall in 'liquidity' have been weighing on domestic asset prices, especially risky assets.
- Chinese liquidity, which we define as the annual change in the Total Social Financing (TSF) 12M sum, fell from over 10tr CNY in October 2020 to nearly -2tr CNY in July.
- The dynamics of China TSF has also been very important for international asset prices (EM equities, industrial commodities, global yields…).
- This chart shows that the China TSF 12M Sum has also acted as a strong (6M) leading indicator of the EURUSD exchange rate in the past 6 years.
- Hence, contracting liquidity from China could continue to weigh on the single currency against the USD in the short to near term.
- EURUSD is currently trading above its key 1.17 support level, which represents the 38.2% Fibo retracement of the 2020/2021 low/high range; a break below that could open the door for a move down to 1.15 (50% retracement).