Vantage FX | China data drives AUD higher, ECB drives Euro to 1.3250| 11th January 2012

January 11, 2013

Gold, Crude and the Aussie dollar were all up overnight on the back of the stronger Chinese data and a weaker US dollar. The ECB’s decision to hold rates and their veiled optimism for 2013 added to the US dollar’s woes with Euro breaking sharply higher to be back near the highs for the past 9 months above 1.32.

Chinese data was always going to be important yesterday but the 14.1% jump in exports was remarkable given that the pundits were expecting a rise of just 4%. This data reinforces the notion that the 7.4% GDP growth we saw in Q3 2012 is the low point in the cycle and growth is looking better once more.

Clearly this is a very positive sign for the Aussie dollar given the relationship between Chinese Growth and Australian GDP growth and also the demand for our rocks and dirt. This re-emergence of Chinese growth also feeds into the Aussie’s outlook via the RBA rate outlook and as noted long term China bulls it is now possible that they don’t cut in February. So positive feedback for the Aussie which is what we saw overnight.

In Europe the ECB is more optimistic about the outlook for growth with ECB President Mario Draghi saying,

“The economic weakness in the euro area is expected to extend into 2013. Later, in 2013, economic activity should gradually recover.

“Several … indicators have broadly stabilised, albeit at low levels and financial market confidence has improved significantly,”

The financial market performance is clearly important for European policy makers and the fact that things have stabilised has taken the pressure off them, at least in their mind, to a very large extent. But it is also an important reality for traders to note when they are approaching the markets and their trades.

It is easy to let your rhetoric or your view on economics and politics cloud your view of trading and or investing – this is always a great challenge for traders but their is a difference between trading and rhetoric as I wrote back in October. You can only trade the market in front of you – hard to do sometimes but important to try.

But in a fundamental and human sense the Greek unemployment data overnight highlighted that the global economic crisis is far from over. The unemployment rate in Greece hit a new record of 26.8% with youth unemployment at 56.6%. These are terrible numbers and Europe, and indeed the globe, will struggle to heal sustainably unless or until we start to see more people back in employment.

But the point is that the market has moved on, perhaps only for the moment but moved on nonetheless. This reality is summarised nicely in a quote I saw on MarketWatch this morning,

“In Europe the recession is not worsening, Chinese growth is accelerating and in the U.S., the worst of the fiscal cliff is behind us,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott.

So the onus is on the global economic bears to make the case at the moment – at least until expectations shift too far toward positivity.

Stocks

Europe didn’t really participate in the Asian or US rally overnight with the FTSE up just 0.05% but as we highlighted in yesterday’s Morning Call it is constrained by trendline resistance at the moment so further gains might be hard fought for the moment. In Germany the DAX  fell 0.16% while in Paris the CAC fell 0.39%. Italy held a bond auction of €8.5 billion 1 year bonds at 0.864% down from 1.456% back in December and the Milanese stock market seemed to like this as they rose 0.72%.

In the US stocks have risen for most of trade and are up strongly with 23 minutes to go before the close. The S&P 500 is up 0.68% or 10 points to 1470. The Dow is up 0.56% and the Nasdaq up 0.49%.

In Asia yesterday the Chinese data and weaker Yen combined to see the Nikkei up 0.7%, the Hang Seng rose 0.58%, Shanghai was up 0.38% and the Straits times rose 0.17%. In Australia the All Ords was up 0.32% and is likely to go higher again today.

Global FX

A night of US dollar weakness with the Euro rocketing higher from a low of 1.3037 to a high of 1.3266 and it sits at 1.3257 up 1.49% on the day. GBP is up as well after the BoE held rates steady. GBP sits just below the high for the night at 1.6156 for a gain of 0.84% on the day. The Canadian dollar was stronger again with USDCAD down 0.26% on the day sitting at 0.9847 while its commodity cousin the Aussie is up 0.77% at 1.0593 which is the Fibo projection from the break of the recent range that occurred after the Chinese data yesterday. The US Dollar did manage to rise against the Yen up 0.35% t0 88.17.

Looking at the Aussie dollar as we noted yesterday it seems to have acclimatised to the air above 1.05 and pushed sharply higher overnight. The Chinese data yesterday was unequivocally bullish for the Aussie as China is Australia’s number one export market and the pick up in its exports will be seen, along with the recovery in iron ore prices from last year’s lows, as positive for national income and likely to forestall the rate and pace of RBA rate cuts.

Techincally yesterday I said that I find it hard to be bullish but the data and the break higher changed that. I tweeted that the target was 1.0593 straight after the data. If stocks are going to continue to rally and if sentiment is going to be for economic recovery then the outlook for the Aussie is for higher prices.

Resistance is 1.0593 and above here 1.0638 and then the top of the uptrend channel the AUD is back inside comes in at 1.0655/65. But it is worth noting that the Aussie has broken, but not yet closed above, the down trend line from the highs in 2011 which is a pretty bullish sign for a run toward 1.08.

The Euro is up near the highs for the last 9 months and a break would be quite bullish but recently any forays to near 1.33 have been swiftly rebuffed so we are going to respect this range top unless or until it breaks. On the day a pullback under 1.32 toward 1.3180 seems in the offing as the hourly overbought status is worked off as you can see in the chart below.

Commodities

Crude is at an interesting juncture at present constrained by two competing trendlines which highlighted last nights range.

The set up is there for a fall based on my system but a short has not yet been triggered and news from China and of Saudi production cuts perhaps means it won’t be. Traders who play Crude should be watching closely in anticipation of a move one way or the other.

Gold and Silver were up sharply on the USD weakness rising 1.36% and 2.05% to $1673 and $30.82 oz respectively. Copper was also buoyed by China and USD weakness and rose 1.04%.

Data

Lots of data but most of it low profile so tonights UK Industrial production is probably the highlight.

Catch me on Twitter @gregorymckenna or @FX_Global

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