Key Events to Focus On This Week
- Full set of weak data from China over the weekend, such as Consumer Price Index (CPI), Trade data and aggregate financing, etc.
- Bank of Japan (BoJ) press conference
- Reserve Bank of New Zealand (RBNZ) rate decision
- Australia’s labor data
Key Events Last Week
- U.S. Institute for Supply Management (ISM) Manufacturing Purchasing Managers’ Index (PMI) unexpectedly dropped to 49.0 from earlier 50.7
- Reserve Bank of Australia (RBA) kept Official Cash Rate (OCR) at 2.75%, tone remains dovish
- Trade surplus was much lower in April at AUD 28m compared to previous AUD 56m
- Australia’s 1Q Gross Domestic Product (GDP) grew 0.6% QoQ, lower than forecast at 0.8%
- European Central Bank (ECB) kept rate at 0.5% with no “stimulus details” in press conference
- U.S. Non-Farm Payroll (NFP) expanded 175k from earlier 149k, while unemployment slightly jumped to 7.6%
Stimulus effect fades as Chinese data starts reflecting negative growth momentum
After China released its full set of economic releases in May, it confirmed slow growth momentum in 2Q and toward the end of the year. Key data, such as Inflation, Trades and Aggregate Financing, suggested weak global and domestic demand at best.Source: Bloomberg, FXPRIMUS Click the image to enlarge
Weak global demand limited Chinese overseas shipping activities in May, cracking down overstated exports figures in previous months, based on imbalanced figures between other countries’ imports and China’s exports.
There are not many measures China could take to boost global demand, unless they excise massive stimulus as they did in Spring 2009 and Winter 2013. However, the chances of that are close to zero. Meanwhile, limited options to prevent the economy from falling further could be either:
- Further loosening monetary policy, such as injecting more liquidities, or
- Deregulating social financing activities for only a short period, since rising housing prices and increased overdue debts trimmed credit expansion.
Story of inflated exports
Amazing exports growth in 1Q was probably due to frauds made by Chinese enterprises, aiming to increase inflow from overseas by escaping the foreign exchange capital control.
There are increasing possibilities that many stocks shift between China and Hong Kong by taking advantage of the special trade zone relationship. This kind of pattern boosts exports (since goods from HK to China counts as exports) without import duties.
Looking at China’s imports tax YoY and China’s imports YoY, we can see that the usual tandem movement broke in 1Q this year.Source: Bloomberg, FXPRIMUS Click the image to enlarge
Increasing money inflow continues to appreciate the Yuan in 2013, cracking down exports dramatically in an actual scenario basis instead of official figures.Source: Bloomberg, FXPRIMUS Click the image to enlarge
Lending plays a key role in both the real economy and capital markets, such as equities. New Yuan Loans in May dropped to USD667.4B from USD792.9B, and the downward trend could continue due to:
1. Overdue loans rising 46% last year, according to a statement from People’s Bank of China (PBOC), adding signs of strain in the Chinese banking system.Source: Bloomberg, FXPRIMUS Click the image to enlarge
2. Higher housing prices limit needs for loans from many households, with the hope on Xi’s “China Dream” to possibly squeeze the housing bubble.Source: 搜房 (Soufun)
However, A-share properties stocks tumbled in May.Source: Bloomberg, FXPRIMUS Click the image to enlarge
Better-than-expected jobs expansion in May lifts possibilities on sooner regime change by Federal Reserve (Fed)
Generally, the Dollar played defensively last week, kicked-off by the sharp falling U.S. Institute for Supply Management (ISM) Manufacturing Purchasing Managers’ Index (PMI), followed by an unexpected “neutral” message from Mario Draghi. However, the better-than-expected U.S. Non-Farm Payroll (NFP) curbed the Dollar sell-off and the Dollar Index (DXY) elevated from level 81.00.Source: Bloomberg, FXPRIMUS Click the image to enlarge
Still, the DXY stayed within the ascending channel since May 2011, due to its relatively strong recovery compared to the rest of the major economies.Source: Bloomberg, FXPRIMUS Click the image to enlarge
Recently, there are some corrections set off by a set of warnings from Federal Open Market Committee (FOMC) members that a slowing (tapering) of its large-scale asset purchases will come sooner or later. There is now emphasis on “sooner” due to the upbeat NFP.
Based on price reaction on the tapering, the fixed-income market is the most sensitive, while equities are the least.Source: Bloomberg, FXPRIMUS Click the image to enlarge
The easy money regime should last for a while, at least before year-end, or with the high uncertainty of its exact exit timing. However, it is crucial to observe current “price action” in different markets serving as a “prophet.”
There is one rule here: what benefitted the past 4-year easy money regime might now start to be a nightmare. “Carries” are typical examples.
Since the U.S. started “green shoots” in 2009 by the Fed’s aggressive stimulus, the Aussie and Kiwi became the best performers. This was not the case with European currencies.Source: Bloomberg, FXPRIMUS Click the image to enlarge
Having that said, European currencies should correlate less with the Fed tapering as well, compared to “Growth/Stimulus” related currencies, such as the AUD, NZD and CAD.Source: Bloomberg, FXPRIMUS Click the image to enlarge
Harder hit on Aussie Dollar might send AUDUSD toward 0.90
The Aussie took another hit by the full set of weaker-than-expected data from China over the last weekend, after the disappointing 1Q GDP growth in Australia announced few days ago. It’s not the end of the story since its trade surplus was much lower in April at AUD 28m, compared to the previous AUD 56m.
Hence, the current situation will not be very favorable for the Australian Dollar in the short term. We simply do not find any catalyst to buy it when the Reserve Bank of Australia (RBA) showed the gesture of “keeping accommodative.”
We prefer to sell the AUDUSD if the pair “technically” rebounds to its closing price last week (around 0.95). The next support stands around 0.94. If this level is penetrated, the AUDUSD could tumble toward 0.90 on a strong selling-off momentum.Source: Bloomberg Click the image to enlarge
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