Vantage FX | Aussie back under pressure as fear factor grows | 13 August 2013

August 13, 2013

Recap

  • The US dollar and the English Cricket team both came back from the brink in the past 24 hours to post fairly solid victories. We won’t talk about the cricket or the Australian batsmen collapsing like an Aussie Dollar assailed by weak Chinese growth- its just too painful. But the US dollar was generally stronger gaining 0.26% against the Euro (1.3303), 0.25% versus the Pound (1.5463), 0.36% versus the Aussie dollar (0.9147) and 0.62% against the Yen (96.82).
  • Indeed if you look at that Yen move, the US dollar generally and the move in Gold (+1.66% @$1336 oz.) you get a sense that the weaker than forecast (by the pundits not us here at Global FX) which came in at just 2.6% annualised with a still negative deflator and with weak industrial production and capacity utilisation released later in the day, I reckon you can see a bit of a fear factor in markets with the weaker growth in some jurisdictions yet chances of taper in the US as early as next month top of mind.
  • Proof, if you need it, that this could be correct is the lead article on MarketWatch this morning asking if the stock market’s larger correction has finally begun. It is a question, not an answer and as such is simple reflective of what others are also thinking but the fact they are thinking it means that gains from here are going to be hard particulalry if US data continues to print on the ok side of ok. At the close the Dow (-0.04% @15,420) and S&P (-0.14% @1689) were both marginally lower while the Nasdaq (+0.27%) was up a little. In Europe Frankfurt (+0.25%) and Milan (+0.44%) were both higher but the FTSE (-0.14%), CAC (-0.11%) and IBEX35 (-0.2%) were all lower.
  • Rates were a little higher in the US with 10’s up 4 points to 2.62%, Bunds were at 1.71% and Gilts 2.47%
  • As noted above on Commodity markets gold was higher but it was Silver that had another huge day rising 4.57% to $21.38 oz. Dr Copper was quiet but the Ags continue to prove Mandelbrot right, volatility begets volatility with Soybean jumping 2.46% while Corn rose 1.02% but wheat was a lot more circumspect rising just 0.16%

On the data front today my favourite indicator of the Australian economy in the NAB Business survey is released but before that we get that the BoJ minutes and Japanese machinery orders. German CPI and PPI is out along with similar data in the UK and Spain before the EU IP and German ZEW data are released. In the US its retails sales, business inventories a speech by Dennis Lockhart and import and export prices.

Oh and of course the release of the Pre-Election Financial update from the Australian Treasury today which is likely to reinforce the challenges going forward for the Australian economy and the budgets finances so there is a small risk to the Aussie from this and the NAB survey today.

Where to for the Aussie dollar

Are there any forex market EliottWavicians out there? Because you might be seeing in the AUD a nice set up for the 5th wave higher if teh 4 hour chart is any guide. I confess to not being mcu of an elliott waver but there are some very strong similarities between Elliott Wave trading and the kind of Fibonacci retracement and projects that myself and many others practice.
I have put the Fibo levels on what you might call wave 3 and we are probably in wave 4 on this move with a 5 to come – maybe. But tehre are some really big key levels to watch.

0.9104 is the 38.2% retracement of last weeks big move and a reasonable level for the Aussie to get back to and still have a topside bias as the dailies suggest it does. Below that 0.9067 is the 50% level. Topside if the Aussie can, big if but if it can, get through yesterday’s high at 0.9219 then we are heading back to the top of the box at 0.9333.

My view is we’ll see this move into the low 91 region and then we’ll see if there is decent support down there.

Why real growth is anything but – Chinese GDP over stated?.

I mentioned in my Weekly on Saturday that inflation is a big part of the GDP equation for Australia (and elsewhere) and so you can get a seemingly strong GDP result if inflation falls but nominal growth could be lower than it is this year. The reason for this is that Economists like to live in the “real” world that exists in their models not the “nominal” world which exists in reality.

This is important because the lower the inflation rate the higher “real” GDP is for any given “nominal” level of GDP. It’s how the RBA fudged its numbers for next year, its how the Australian Treasury has been able to get its “real” GDP forecasts right while getting its nominal forecasts hopelessly wrong and it seems that perhaps it is how the Chinese are actually managing to get their GDP to stay up if a story I saw on FX Street yesterday is to be believed.

The story asserted – full link here,

Christopher Balding of the HSBC Business School at Peking University noted in a new study that China has been overstating their economic growth indirectly by understating their inflation rate by manipulating the Chinese housing data in various ways.

Whether this is true or not it is important in a broader context to remember that when you here economists waxing lyrical about growth and GDP growth in particular that maybe, just maybe all is not what it seems.

I would argue this is the problem in Australia – nominal growth is slowing and Australians a feeling it but rela growth is doing ok because inflation is and will remain low.

Do your self a favour – if you want to know what is really going on in the Australian economy have a look at the NAB business survey this morning.

Try a Vantage FX demo account, free today.

Greg

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