Vantage FX | Euro and GBP tank on weak outlook, Aussie strong | 10 July 2013

July 10, 2013

Recap

The IMF downgrade its growth forecast for the globe and for China and Brazil overnight both for this year and next but stocks and the Aussie Dollar shrugged this off as stocks hoped downgraded forecasts for Q2 earnings were too pessimistic and the Aussie Dollar came back from a foray below 91 cents in early Asian trade.

Euro came under pressure as did the Pound after some terrible Industrial and Manufacturing data halted its rally and knocked it for six in European trade.

IMF downgrades growth

I think it is important to give as full a detail of the IMF downgrade as possible for this growth outlook as this downgrade reminds me of 2008 and 2009 when things slid away during the year and growth was consistently and constantly downgraded. So you can read the full press release here and the a fair chunk of the executive summary is below.

Global growth is projected to remain subdued at slightly above 3 percent in 2013, the same as in 2012. This is less than forecast in the April 2013 World Economic Outlook (WEO), driven to a large extent by appreciably weaker domestic demand and slower growth in several key emerging market economies, as well as by a more protracted recession in the euro area. Downside risks to global growth prospects still dominate: while old risks remain, new risks have emerged, including the possibility of a longer growth slowdown in emerging market economies, especially given risks of lower potential growth, slowing credit, and possibly tighter financial conditions if the anticipated unwinding of monetary policy stimulus in the United States leads to sustained capital flow reversals.

The Financial Times quotes IMF Chief Economist Olivier Blanchard as saying,

If you look country by country it seems to be specific…so in China it looks like unproductive investment, in Brazil it looks like low investment and in India it looks like policy and administrative uncertainty

Now of course my main focus is on China because as I have written in the weekly for a while now I believe the President, Premier and PBOC are seeking to execute a slowdown in China so as to reorganise its growth profile towards something more productive, sustainable and fairer for the wider Chinese population. So of course the risk is that China undershoots its own growth targets and certainly the IMF’s expectation of 7.7% for China seems heroic and likely to be further revised down sharply. This is a double whammy because of the relationship between Chinese growth and German exports over the past decade especially the past 5 years so China and Europe continue to worry me longer term and pose risks for the Aussie dollar and the Australian economy.

Markets playing a specific game

Interestingly as Olivier Blanchard said in the quote above a certain specificity is creeping into markets which is great for traders and asset allocators because it means everything isn’t correlating to 1 and we saw that last night when the Australian dollar rallying strongly after yesterday’s selloff to 0.9080 before a rally and selloff and rally and bit of a selloff to sit at 0.9172 at the moment.

You can see the specificity in the EURAUD cross above which is sitting around 1.39 this morning  likely to test range support at 1.38 which if it breaks opens the way to 1.3570.

On the Aussie specifically I made money selling twice yesterday at opportune times using the hourlies but as I noted if the Aussie was able to build on the daily close of the previous day it might be able to rally a little against the USD. 0.9217 is key short term resistance and if that breaks maybe a 1 cent run higher. I’ll probably sell into the rally if it occurs short term while below 17 and if you missed the NAB business survey yesterday check out MacroBusiness – if there isn’t a couple of rate cuts in this survey I’d be very very very surprised.

Turning now to the Euro and Pound, or should I say Pound first we see exactly the type of thing the IMF is talking about. Uk industrial and Manufacturing production released last night for May both missed badly printing -2.3% and -2.9% respectively for the YoY results. This knocked GBP for six and off its highs around 1.4980 falling to a low around 1.4812 before recovering a bit to 1.4870 as I write. I have a sell stop in for a break of 1.48 which I believe will presage a much deeper move. For the moment though it might find a little support again in front of 1.48.

Euro also had a shocker knocked from a high of 1.2998 to a low of 1.2754 by comments from ECB executive board member Jörg Asmussen that rates were going to be kept low for at least 12 months. Of course coming after the comments from ECB Boss Mario Draghi that rates would be accommodative for an extended period this simply reinforces, along with the IMF outlook and recent German data, the stark contrast between the path of European and US monetary policy. Euro is now focused toward a run at 1.2660 in the days and week ahead. Resistance is 1.2804.

Stocks in the US remain bouyant

Stocks in the US had another good day in what was quiet trade. Apparently, based on newswire reports, many traders reckon that the numbers might have been downgraded far enough or too far and as a result the chances of companies reporting better than expected revenues and sales have increased. It is about slights or hand and expectations and Keynes beauty parade so this might be right and I have not the specific knowledge to judge one way or the other.

What I do know however is that the S&P 500 has now taken out both resistance trendlines in the past couple of days and is not too far from its all time high. Personally I would like to see a run at it as I believe this would complete the trend a move to 1685 would complete this move.

At the close the Dow was up 0.49%, the Nasdaq rose 0.55% and the S&P up 0.70%. In Europe the FTSE managed to rally 0.98% which you have to question on rational grounds but far be it for me to ever say investors or markets are rational. The DAX was up 1.12%, the CAC up 0.53% while stocks in Milan and Madrid were down a tiny amount.

Watch out for crude to be a handbrake on growth

Gee whiz – the global economy can not afford a Crude oil price at $104.52 (+1.34% overnight) and I see this as a very big handbrake on growth globally and a big risk going forward. On other markets Gold was 0.89% higher at 1247 but it is off the 1256 level just before the Euro and GBP got smashed. Corn was 1. 77% higher, Wheat 2.34% and Soybeans rose 0.25%.

Data

Today we get South Korean employment data, Westpac Consumer Confidence in Australia and then important Chinese trade data, new loans and foreign reserves. CPI in Germany is out also on Wednesday along with industrial production in Italy. In the US its the FOMC minutes which will have the tea leave readers like me pouring all over them.

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