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For those who were home in bed, devastated that there will not be a Mean Girls sequel (we’re crushed as well), you may have missed the reversal in risk sentiment thanks to economic news from China.  What the heezy is going on?

It all started last weekend, with the bad data snowballing into an avalanche of risk-off moves on Thursday:

  • Chinese Exports -18.1% in February vs. 7.5% forecast and Trade Balance -$22.99B vs. $14.5B forecast.
  • Chinese inflation ticks lower: CPI 2.0% vs. 2.1% forecast and 2.5% previous; PPI -2.0% vs. -1.9% forecast and -1.6% previous.  Weak inflation gives the central bank room to take policy action, but the trend of weak PPI may start raising deflation concerns.
  • New bank loans dropped to 645B yuan, almost half of the 1.32T yuan in the previous month.
  • Chinese Retail Sales dips to 11.8% vs. 13.5% forecast and 13.1% previous read.
  • Chinese Industrial Production y/y lower to 8.6%, below 9.5% forecast and 9.7% previous.  Lowest reading since Q2 2009.

Not too long ago, China was once the shining beacon of hope to help support all of global growth, but over the last year it looks like its brightness might be fading. And along with the geopolitical risks between western powers, Ukraine and Russia, traders from all walks of life decided to lighten up on risk and run to safe havens.  Equity markets are taking a big hit across the globe for the week (Nikkei 225 -6.45% and FTSE -3.70%), while government bond yields dropped on high demand for safety (U.S. Treasury 10-year notes down 14 basis points to 2.64%).

For forex traders, this means it was a rush out of higher-yield currencies like the Kiwi and Sterling, and back into the “safe havens” (or funding currencies) like the U.S. dollar or Swiss Franc.  But the biggest benefactor of risk aversion behavior is the Japanese yen.  Check out this week’s forex charts of yen price action against the usual risk currencies: 

Yen Pairs: 1 Hour Forex Charts
Yen Pairs: 1 Hour Forex Charts

Even with positive events from New Zealand and Australia this week, the Kiwi and Aussie couldn’t fight against the rush of forex traders getting out of risk trades and buying back the yen.

So, what’s next for China? Well, the slow start for China in 2014 may spark the question for whether a new economic stimulus plan is needed, especially now that Wall Street has dropped Chinese GDP forecasts for 2014 to just above 7.0%–below the government’s new target of 7.5% growth. But before we starting freaking out, let’s remember that one month’s worth of terrible data is not yet a trend.

It’s obvious we can no longer be blindly bullish on China and global growth; we’ll just have to be more picky on how we play opportunities on both the long and short side of risk. Whatever your bias may be, it’s a good idea to watch the Japanese yen for now as it may see the most action among currencies and as the markets may go back into risk-on/risk-off mode.