Weak Chinese Data Spurs Stimulus Hopes, Majors Rally Against US Dollar
After yesterday’s sharp sell-off in European equities, global investor sentiment was looking rather bleak: the Spanish bailout was in question, especially after Catalonia threatened to secede; Chinese growth issues persisted; and many found themselves questioning whether or not the recent bout of easing by the Bank of Japan, the European Central Bank, and the Federal Reserve would do much of anything to help their respective jurisdictions’ economies.
With another bad batch of Chinese data out, which showed Industrial Profits in August feel for the fifth consecutive month, speculation has arisen that the People’s Bank of China will do something to help stimulate the economy. Accordingly, the PBoC has added ¥365 billion Yuan ($58 billion) to money markets this week, with the aim of preventing liquidity issues without spurring inflation concerns. Furthermore, more easing is expected out of China with all signs pointing to a very sharp economic slowdown (the “hard landing”).
The Chinese stimulus story has been the main driver for risk-appetite today, considering that European economic data (confidence figures) and a report by Fitch Ratings on the European growth picture haven’t been all that inspiring. As such, while the Euro has lagged (barely lower against the US Dollar), the commodity currencies, the Australian, Canadian, and New Zealand Dollars, as well as the ultra-resilient British Pound, have gained traction ahead of the US cash equity open thus far on Thursday.
Taking a look at credit, peripheral European bond yields are mixed, but lower, on the day. The Italian 2-year note yield has increased to 2.431% (+7.0-bps) while the Spanish 2-year note yield has decreased to 3.267% (-4.7-bps). Similarly, the Italian 10-year note yield has decreased to 5.176% (-1.1-bps) while the Spanish 10-year note yield has decreased to 5.947% (-5.2-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 10:46 GMT
There are many significant data pieces due out today, especially ahead of the US cash equity open at 08:30 EDT / 12:30 GMT. To start, the USD Gross Domestic Product (Annualized) (2Q T) reading is due, and should show in its final revision that growth was at a mere +1.7% in the second quarter (though compared to European growth rates, it is phenomenal). Alongside the growth reading, the USD Gross Domestic Product Price Index (2Q T) is expected to confirm price pressures of +1.6% quarter-over-quarter, a reading below the Federal Reserve’s desire +2.0% threshold.
Beyond the growth revisions, also due out at 08:30 EDT / 12:30 GMT is the USD Durable Goods Orders (AUG) report, which is forecasted to show a steep -5.0% decline on a monthly-basis after +4.2% m/m growth in July. Needless to say, this will raise concerns about the strength of the American consumer as well as the fiscal cliff. Rounding out the pre-open data, USD Initial Jobless Claims (SEP 22) are due as well, with a slight drop expected. It should be noted that claims have missed consistently the past few weeks with revisions creeping higher as well.
EURUSD: An Inside Day today has kept our levels from yesterday intact: “With the pair closing below the 61.8% Fibo retracement (February 2012 high to the July 2012 low) at 1.2934 [on Tuesday], a move towards the next level of support in the mid-1.2800s was to be expected. Interim support comes in at 1.2825/40 (20-EMA, 200-DMA, late-April swing high). Near-term resistance lies at 1.2905/10 (5-EMA), 1.2930/35, 1.3000, 1.3145, and 1.3165/75 (September high).”
USDJPY: Price hovers near the key 77.65/70 level, a major level of support considering it was the June 1 swing low that held for three-months. A daily close above this level eyes resistance at 77.90, 78.10/20, 78.60, 78.90/95 (100-DMA, descending trendline off of the April 20 and June 25 highs), and 79.20/30 (200-DMA, September high). Should price close at or below 77.65/70, support comes in at 77.45/50, and 77.10/15 (September low).
GBPUSD: The GBPUSD rebound today comes as no surprise considering that it had held up remarkably well amid a flight to safety the past week or so. Price has rebounded ahead of the key 1.6120/40 level, leaving the door open for a move towards 1.6400 by the end of the month. “The former April swing highs at 1.6260 (by close), 1.6300 (by high) are in focus, now that the descending trendline off of the April 2011 and August 2011 highs broke last week. Below 1.6120/40 support comes in at 1.6095/1.6100 (20-EMA), 1.5970 (ascending trendline off of August 2 and August 31 lows, former channel resistance off of June 20 and August 23 highs), and 1.5770/85 (late-August swing lows).
AUDUSD: The 61.8% Fibo retracement (September 6 low to the September 14 high) coupled with the 200-DMA at 1.033/40 held as support yesterday, allowing for a rebound today. It is worth noting that a Falling Wedge has formed on the 4-hour charts off of the high, with a close above 1.0420/30 suggesting a breakout back towards the highs. Interim resistance comes in at 1.0415/25 (20-EMA, mid-August swing lows), and 1.0480/85. Near-term support comes in at 1.0370/85 (descending trendline off of the August 9 and August 23 highs, 50-EMA), 1.0335/40, and 1.0270/80.
--- Written by Christopher Vecchio, Currency Analyst
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