AUD/USD Hit By Weak Data From China, RBA In Line With Expectations

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AUD/JPY: long at 84.70, target 87.30, stop-loss 83.30, risk factor **

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AUD/USD Hit By Weak Data From China, RBA In Line With Expectations

(stay sideways)

• Australia’s central bank kept interest rates unchanged, as widely expected decision. It cemented its wait-and-see stance by repeating that it would assess upcoming economic data to judge the impact of past easing. The RBA gave no fresh guidance on the rates outlook, as it normally does after a no change decision.
• The RBA appeared comfortable with the level of the AUD, reiterating that it is adjusting to significant declines in key commodity prices. The RBA noted a recent spike in global stock market volatility triggered by “developments in China”, but offered no insights.
• The market was focused also on Chinese data today. China’s official manufacturing Purchasing Managers’ Index fell to 49.7 in August from 50.0 in July. A private survey by Caixin/Markit focusing on smaller factories pointed to an even sharper cooldown, with the PMI dropping to 47.3, the worst reading since March 2009. The official services reading cooled slightly to 53.4, while remaining well in expansion territory, but the private survey PMI fell sharply to 51.5, its lowest level since July 2014.
• Reuters citing sources with direct knowledge of the matter informed today that China’s central bank plans to tighten rules on trading of currency forwards from October, in a move to curb speculation and volatility after a shock devaluation of the currency last month. The sources said the Chinese central bank will require banks trading currency forwards to set aside reserves from October 15. Banks will be required to keep the equivalent of 20% of their clients’ forex forwards positions in dollar reserves to be held for a year at no interest.
• AUD/USD investors will be now eyeing second-quarter GDP data (Wednesday, 0:30 GMT). Today’s data from the Australian Bureau of Statistics (ABS) showed net exports will take a bigger bite out of second-quarter GDP than expected by the market. According to the ABS, net exports should detract 0.6 percentage points from GDP as export volumes retraced after the recent boom. The market consensus had been for a smaller 0.3 percentage points detraction. In contrast, government consumption rose 2.2%, driven by defence spending, while investment jumped 4.0%. The strong public sector demand could have saved GDP after negative net exports revision. However, we still are the opinion that the second-quarter GDP growth may slightly below the market consensus (0.3% qoq vs. market expectations of 0.4% qoq). This would take the annual rate down to 2.1% from 2.3% in the first quarter, the slowest since third quarter 2013. Such an outcome would come as no surprise to the RBA, which is forecasting GDP growth of between 2 and 3% yoy to June 2016.
• The AUD/USD was hit by weak Chinese data and reached a day’s low at 0.7067. There are some strong support levels ahead of us – 0.7044, low on August 24 and psychological barrier at 0.7000. We do not expect these levels to be broken without stronger fundamental reasons. On the other hand, we do not see also fundamental reasons for stronger short-term correction of current bearish trend in the AUD/USD.
• The volatility on the AUD/USD may remain high in the coming days, as the investors are focusing on developments in China and commodity prices. That is why in our opinion no position is justified on the AUD/USD from the risk/reward perspective. However, we used today’s AUD depreciation to get long on the AUD/JPY at 84.70.

Significant technical analysis’ levels:

Resistance: 0.7177 (high Aug 31), 0.7195 (10-dma), 0.7206 (high Aug 28)

Support: 0.7044 (low Aug 24), 0.7000 (psychological level), 0.6990 (low Apr 28, 2009)