Chinese Data On The Soft Side, European Yields Slide
Swissquote Bank Ltd | Aug 12, 2016 06:46AM ET
Forex News and Events
China data slows (by Peter Rosenstreich)
The sprint into yields continues unabated by the further contracting of rates across the globe. The August lull in trade has created the ideal scenario for risk seeking as volatility remains low and news flow thin. While we don’t see any reason to swim against the current we need to stay vigilant of events that might derail the current risk euphoria.
Data released today indicates that China’s economic stabilization strategy is wavering slightly. China’s July activity data in industrial production, retail sales and investments all disappointed pushing forecasts for GDP growth below 7.0%.
Today’s data was not completely unexpected as PMI reads had shifted below 50 earlier in the month (China manufacturing PMI 49.9) and soft trade data release indicates that the economy is stressed.
The Chinese consumer remains active but slower paced as annual retail sales rose to 10.2% (driven by a surge in passenger car sales increased by 23% y/y), against 10.6% prior read. Industrial production remains stagnant, rising an unimpressive 6.0%.
Finally, urban fixed asset investment, which had been a bright spot for growth during Q1, declined to an annualized pace of 8.1% from 9.0%. The soft investment read reversed the prior uptick, which was driven by extensive government expansion program, continuing a worrying downward trend. Investment into state-own enterprises was elevated but turning lower.
To make matters worse, private investment fell to a new record low at 2.1% as falling global demand hurt business confidence. As government policy is geared toward priming the investment pipes it is clear that official spending is not big enough to offset the contraction in private investment.
Setting policy mix has become significantly more complex as economic data has diverged and become regional. China’s housing markets remain firm as sales surged 18.7% y/y, yet suggests that households have ratchet up leverage.
The government has been vocal over concerns about a housing bubble, continuing to implement micro-turning measures; slow expansion, however, PBoC loose monetary policy encourages speculation.
Moving forward, it is likely that the policy mix will increasingly skew towards targeted fiscal spending over direct easing. Given the risk form, shadow banking and rising financial leverage interest rate cuts and adjustment to RRR will become less frequent.
We anticipate that so long as growth deceleration does not become unstable, monetary policy will remain accommodative with a probability of a 25bp cut in Q4. As for the CNY decrease, expectations for PBoC action should allow CNY to firm.
European yields continue to decline (by Yann Quelenn)
Get The News You Want
Yesterday was a great day for bonds investors. At European market closing yesterday, German, Italian Spain and Portuguese bonds all closed way higher but yields also lowered on most of their maturities, as was the case with Italian and Spanish 10-year maturity yields with both finishing at record lows.
Contrary to the colossal debt of most European countries, financial markets are actually flocking towards bonds looking for capital appreciation despite the negative yield of return on these govies and this complete economical nonsense shows no signs of stopping.
Massive ECB QE is lowering the cost of borrowing and at the same time European institutions are backing up the debt of European countries. The road towards negative interest rates continues with no end in sight.
The BoE’s asset-purchase program increase is a perfect example of investors being given an incentive to go towards fixed income instruments and riskier assets. Markets are upside down right now, bonds and stocks are positively correlated and economies’ fundamentals are not correctly reflected into asset prices.
AUD/USD - Ready For Another Upside Move.
The Risk Today
Yann Quelenn
EUR/USD is trading below 1.1200. A break of hourly resistance at 1.1234 (02/08/2016 low) is needed to confirm deeper buying pressures. The road remains nonetheless wide-open towards hourly support that can be found at 1.1046 (05/08/2016 low).
Expected to further decline. In the longer term, the technical structure favours a very long-term bearish bias as long as resistance at 1.1714 (24/08/2015 high) holds. The pair is trading in range since the start of 2015. Strong support is given at 1.0458 (16/03/2015 low). However, the current technical structure since last December implies a gradual increase.
GBP/USD still lies within a downtrend channel. The pair is trading below 1.3000 and the bearish momentum remains lively. Hourly resistance can be located at 1.3097 (08/08/2016 high). Expected to head towards support implied by the lower bound of the downtrend channel around 1.2900/20.
The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment,
USD/JPY keeps on trading between hourly resistance at 102.83 (02/08/2016 high) and hourly support at 100.68 (02/08/2016 low). A failure to go above 102.83 support a continued medium-term bearish momentum. We favour a long-term bearish bias.
Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).
USD/CHF continues to trade between hourly support at 0.9634 (02/08/2016 low) and strong resistance given at 9956 (30/05/2016 high). Buying pressures seem weak and should indicate that a reversal towards 0.9634 is likely.
In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.
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