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Bullish AUD/USD Setup Vulnerable to Slowing China Inflation

Bullish AUD/USD Setup Vulnerable to Slowing China Inflation

2014-07-08 21:00:00
David Song, Currency Strategist
Share:

- China Consumer Price Index (CPI) Expected to Slow for Third-time in 2014.

- CPI of 2.5% Remains the Highest Reading for This Year.

Trading the News: China Consumer Price Index (CPI)

A slowdown in China’s Consumer Price Index (CPI) may spark a bearish reaction in the AUD/USD as it dampens the outlook for global growth.

What’s Expected:

Bullish AUD/USD Setup Vulnerable to Slowing China Inflation

Click Here for the DailyFX Calendar

Why Is This Event Important:

The risk of a further slowdown in China – Australia’s largest trading partner – may put increased pressure on the Reserve Bank of Australia (RBA) to further embark on its easing cycle, and we may see Governor Glenn Stevens continue to toughen up the verbal intervention in an effort to further assist with the rebalancing of the $1T economy.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Industrial Profits (YoY) (MAY)

--

8.9%

Westpac-MNI Consumer Sentiment (JUN)

--

112.6

Gross Domestic Product s.a. (QoQ) (1Q)

1.5%

1.4%

Slowing inflation may raise the risk for a ‘hard landing’ in China as the government takes the region to a more consumer-based economy, and a dismal CPI print may dampen the appeal of the Australian dollar as it limits the RBA’s scope to normalize monetary policy sooner rather than later..

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Purchasing Manager Index Manufacturing (JUN)

51.0

51.0

Retail Sales (YoY) (MAY)

12.1%

12.5%

Leading Index (APR)

--

100.11

Nevertheless, stronger consumption paired with the pickup in business outputs may continue to fuel price growth in China, and a better-than-expected release may prop up the AUD/USD as it raises the fundamental outlook for the Australian economy.

How To Trade This Event Risk(Video)

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Bearish AUD Trade: China CPI Slows to 2.4% or Lower

  • Need red, five-minute candle following the release to consider a short trade on AUD/USD
  • If market reaction favors a short aussie trade, sell AUD/USD with two separate position
  • Set stop at the near-by swing high/reasonable distance from entry; look for at least 1:1 risk-to-reward
  • Move stop to entry on remaining position once initial target is hit; set reasonable limit

Bullish AUD Trade: Price Growth Tops Market Expectations

  • Need green, five-minute candle to favor a long AUD/USD trade
  • Implement same setup as the bearish Australian dollar trade, just in reverse

Potential Price Targets For The Release

AUD/USD Daily

AUD/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Preserve Ascending Channel for Now While RSI Retains Long-Term Bearish Trend
  • Interim Resistance: 1.3770 (38.2% expansion) to 1.3790 (38.2% retracement)
  • Interim Support: 1.3490 (50.0% retracement) to 1.3500 Pivot

Read More:

AUDUSD July Range Targets Key Support- Shorts Favored Sub 9440

Price & Time: Big Week for the Aussie

Impact that China Consumer Price Index has had on AUD/USD during the previous month

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

MAY 2014

6/09/2014 1:30 GMT

2.4%

2.5%

+8

+26

May 2014 China Consumer Price Index (CPI)

AUD/USD Chart

China consumer prices increased an annualized 2.5% in May after expanding 1.8% the month prior, while the Producer Price Index (PPI) slipped 1.4% during the same period following the 2.0% contraction the month prior. The strong inflation print propped up the Australian dollar, with the AUD/USD climbing back above the 0.9350 region.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

To be added to David's e-mail distribution list, please follow this link.

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