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Australian Dollar Vulnerable as Chinese Data Outlook Dims Some More

Australian Dollar Vulnerable as Chinese Data Outlook Dims Some More

2012-07-06 23:17:00
Christopher Vecchio, CFA, Senior Strategist
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Australian_Dollar_Vulnerable_as_Chinese_Data_Outlook_Dims_Some_More_body_Picture_5.png, Australian Dollar Vulnerable as Chinese Data Outlook Dims Some More

Fundamental Forecast for Australian Dollar: Bearish

The Australian Dollar had a mediocre week, finishing in the middle of the pack against the majors covered by DailyFX and finishing down 0.25 percent against the US Dollar. The Aussie depreciated by a slight 0.42 percent against the top performer, the Japanese Yen. Indeed, the bullish sentiment for high beta currencies and risk-correlated assets such as the Australian Dollar was tempered following last week’s Euro-zone Summit, as the currency barely scratched higher from its opening prices as the week went on. Although the AUDUSD climbed to its highest level since the first week of May, Friday’s price action has yielded a weekly Shooting Star (or Inverted Hammer), signaling a bearish reversal of the rally off of the June 1 low. When combined with the data outlook for the Aussie, there’s a neat synergy of fundamentals and technicals that suggest the Australian Dollar should weaken in the days ahead.

In terms of Australian data itself, there are a plethora of releases that could guide the Aussie for the coming periods. Mainly, the bulk of the data comes during the middle of the week, on Wednesday and Thursday. On Wednesday, the Westpac Consumer Confidence survey for July will be released, and like the NAB Business Confidence survey, that too appears to be poised for a turn lower. Home Loans data for May will be the lone bright spot for the economy this week, with a Bloomberg News survey projecting a 0.8 percent increase after a 0.2 percent increase in April.

Finally, on Thursday, we get to the meat of the market moving Australian data: the June labor market reading as well as the July inflation forecast. The Australian labor market has grown substantially the past few months, adding 123.3K jobs since January alone. But this trend will halt, according to forecasts. The economy is forecasted to have neither gained nor lost any jobs, and this is expected to send the Unemployment Rate back to 5.2 percent from 5.1 percent. Alongside the Consumer Inflation Expectation for July, which should show further weakness given weak commodity prices and a slowing Chinese economy, Thursday appears to be lining up to be a weak day fundamentally for the Australian Dollar.

Speaking of China, it is indeed the Chinese data due out this week that is likely to have the greatest material impact on the Aussie as well as the other commodity currencies. On Monday, the Chinese Consumer Price Index and the Producer Price Index for June will be released, both of which are expected to show declining price pressures. The CPI will drop from 3.0 percent to 2.3 percent, its lowest reading since early-2010, while the PPI is forecasted to decline to -2.0 percent from -1.4 percent (both on a yearly-basis). On Tuesday, Trade Balance figures are due, and while a surplus is expected to grow, Exports are forecasted to drop from 15.3 percent growth in May to 10.6 percent growth in June.

Finally, in what is the most important data release likely to influence the Australian Dollar this coming week, Chinese second quarter growth figures are due. The headline GDP figure is expected to decline to 7.7 percent from 8.1 percent on a yearly-basis, though only drop to 7.9 percent on a year-to-date basis. Similar to the underperformance of the first quarter figure, we expect the second quarter figure to come in lower, likely in the 7.5-7.8 percent range.

Overall, considering these releases from Australia and China, the Australian Dollar’s fundamental outlook is increasingly bleak, and we could very well close the week below parity in AUDUSD should these data come in at or below the markets’ expectations. –CV

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