China's Dodgy GDP Number Lifts the Dollar

The euro is declining against the dollar for the third consecutive day -- its longest streak since the beginning of the month:

Source: Bloomberg as of 2:50 p.m. EDT on Oct. 19, 2015. CAD = Canadian dollar. GBP = British pound.

There are two complementary narratives being floated to explain the dollar's relative recent strength.

On the dollar side, the foreign-exchange market is said to be focused on today's Chinese GDP number. According to the National Bureau of Statistics of China, the country's GDP grew 6.9% year over year in the third quarter, beating the consensus forecast of 6.8%. The latest number is consistent with the 7% growth rates recorded in both the first and second quarters, and it keeps the country on track to achieve the government's annual growth target of "about 7%" for 2014.

As far as economic data goes, China's GDP may one day replace the monthly U.S. employment situation report (a.k.a. "nonfarm payrolls," "U.S. unemployment," or simply "the jobs number") as the most closely followed economic release. However, for that to happen, China's GDP estimate would first have to achieve greater credibility among financial market participants, many of whom believe China currently "massages" its GDP figures by manipulating the price deflator.

So, back to the U.S. dollar: How does it relate to Chinese GDP? It all comes back to the Federal Reserve (as does any self-respecting explanation for a price move in financial markets nowadays).

Indeed, the minutes of September's Federal Open Market Committee meeting show Fed policymakers were concerned about the impact of a slowdown in China's economy, among other risk factors that prompted them to postpone the first post-crisis interest rate hike. As such, today's GDP growth number, inasmuch as it beat estimates, contributes to expectations for an earlier rate rise (notwithstanding concerns about the accuracy of the number). The last plank in the argument is that a rate rise is bullish for the U.S. dollar (higher deposit rates make the dollar more attractive).

By contrast with expectations for an earlier tightening of monetary policy in the U.S., foreign-exchange traders are reported to be giving more weight to the possibility that the European Central Bank will announce an expansion of its quantitative easing program. In January, the ECB committed to 60 billion euros in monthly asset purchases until September 2016. Quantitative easing is thought to be bearish for the underlying currency.