More weak economic data from China and the Eurozone are weighing on the Australian dollar and euro, although both currencies have shown surprising resilience and even some rally potential of late.
After a boisterous Friday session that saw currency markets explode in the wake of much-better-than- expected US non-farm payroll (NFP) numbers, this week's trade started on a much more muted note after Chinese and Japanese data disappointed. Chinese data released over the weekend showed that inflation increased while growth slowed.
Chinese CPI rose to 3.2% from 3.0% forecast, while retail sales expanded at only a 12.9% rate versus 14.5% eyed. Industrial production was also lower at 9.9% versus 10.4% expected. The drop in consumption was led primarily by the new Chinese government frugality campaign as high-end restaurants in Shanghai and Beijing saw sales drop by as much as 30%-50% on less spending by government bureaucrats. Analysts also attribute some of the slowdown to seasonal factors like the Chinese New Year in February.
Nevertheless, the broad weakness in these latest Chinese numbers spurred some concern amongst investors and the Australian dollar (AUD) gapped lower by 30 points at the start of Asian trade, dropping below the 1.0200 level against the US dollar (USD) before recovering in morning European trade.
The Aussie has now carved out a very narrow 1.0150-1.0300 range while traders await more data from down under, and this Wednesday's unemployment report is likely to be the key driver of trade. The markets are looking for similar print as last month, which was approximately 10K. If the data meets or beats the expectations, the AUDUSD pair could break the upside barrier of the range as fears about additional rate cuts by the Reserve Bank of Australia (RBA) will cease. However, if the number shows that jobs contracted, the pair could tumble towards parity as fears over the broad economic slowdown in the Asia-Pacific region will weigh heavily on the unit.
Against All Odds, EURUSD May Rally
Meanwhile, the EURUSD has managed to hang tough despite additional weak economic data. Today's French industrial production report showed a -1.2% contraction versus -0.10% expected, and Italian GDP lost -2.8% versus -2.7% anticipated. The only bright spot on the Eurozone economic calendar was the German trade figure, which saw the surplus rise to 13.7B from 12.1B the month prior as exports increased by 1.4%.
Still, despite all the bad news, the fact that the Italian BTP/German bund spread continues to widen, and the steady uptick in Italian CDS rates, the euro refuses to go down without a fight. On Friday, the EURUSD pair twice found support at the 1.2950 level, and today, it has traded above the 1.3000 mark as it remains steady in a quiet consolidation.
One possible reason for the unit’s strength is the assumption that the worst may be over for the Eurozone. This was the key argument of European Central Bank (ECB) President Mario Draghi at last Thursday's ECB presser. Mr. Draghi argued that over the medium term, conditions were likely to improve, noting that much of the fiscal budget cuts have already been made. Furthermore, the strength and robustness of the US economy may be viewed as an engine for growth for the Eurozone while investors hope that US demand will prop up the region's export sector.
See related: Euro Pulls off a Man-Made Rally
The surprising resilience in the EURUSD may be nothing more than a pause in the overall downtrend, but the longer the pair remains supported, the more likely it is that we will see a countertrend rally unfold this week as bargain hunters decide to plow in.
By Boris Schlossberg of BK Asset Management