AUD recovered overnight on the “strong” Chinese “data” and largely ignored the Reserve Bank of Australia minutes. The minutes were not particularly AUD supportive, as they commented on a subdued (though stabilising) labour market and an ongoing satisfaction with keeping the policy rate stable. There was the usual complaint that the Aussie is too strong as well.
AUDUSD
The reversion to the mean is now virtually complete in AUDUSD, as the brutal, steep and relentless selling that characterized September has yielded to a complete lack of direction and endless churning in October. I can only say that the market would be well advised to glance over at the two-year interest rates in Australia, which jerked back lower overnight and are at their lowest level since early September.
Chinese data
The Chinese gross domestic product and other data was marginally better than expected, but is (as always) to be taken with the usual truckload of salt. A provocative post (hat tip to the resourceful folks at FTAlphaville) over at George Magnus’ blog discusses a theory that many Chinese activity levels are over-reported as a way for corrupt officials to engage in massive embezzlement of funds.
A lot has been built, but is it as much as the Chinese data are telling us? Photo: iStock
According to Magnus, there is a mismatch between credit growth and the real, "Chinese miracle"-related construction growth (as measured by steel and concrete usage). The argument is that this may have a silver lining, as it is easier to recover from mislaid funds than to recover from malinvestment.
Looking ahead
The USD is on the defensive across the board again, with USDJPY doing the most damage, followed by a squeeze in the likes of AUDUSD and NZDUSD. The latter are extremely tough to swallow for this particular analyst, but after so many weeks of churning aimlessly in the ranges, the bears are vulnerable to a squeeze here in the limbo ahead of next week’s Federal Open Market Committee meeting.
There is also more room for near-term upside without causing a trend change, which would make it painful to hold these positions as everyone wonders whether the next FOMC meeting is going to prove a watershed dovish event.
NZDUSD above 0.8000 looks very expensive, but even a 38.2% Fibonacci retracement of the last big wave down from above 0.8800 doesn’t come until 0.8140, just for perspective. Patience and a good bearish reversal is required to restore the bearish prospects.
The Aussie, meanwhile, is likely to key off tonight’s quarterly inflation data, which came in at a more than four-year high in the second quarter and has likely cooled a bit since. The more it has cooled, the more quickly we can get back to focusing on the downside in AUDUSD.
The real key for the USD outlook is USDJPY, with some capitulation in USD longs across the board possible if we can’t hold the line at 105.50/00 in the coming days. For EURUSD, the key resistance beyond the local highs looks like 1.2960 and then what I imagine has to be European Central Bank president Mario Draghi’s line in the sand at 1.3000.
"Thou shalt not pass." Photo: Getty Images
Hope returns tactically for USD bulls if we can get a smart reversal stronger by mid-week, below 1.2700 in EURUSD, for example, and back above 107.50 in USDJPY.
I have NOKSEK on my radar as the Norges Bank meeting approaches on Thursday. The relative valuation looks like it has overly punished NOK relative to SEK. Note that the 200-day moving average around 1.0950 has been in play over the last few days, as well as the flat-line support extending down to 1.0850.
Technically, the picture still looks bearish, but let’s see where we stand in the days ahead. On a dovish Norges Bank, we may have to focus on the 1.0750 and 1.0500 areas before seeing a recovery.
The calendar in Europe and the US today is about as uninteresting as they come as we await tomorrow’s US CPI data.
Economic Data Highlights
- China Sep. Retail Sales rose +11.6% YoY vs. +11.7% expected and +11.9% in Aug.
- China Sep. Industrial Production rose +8.0% YoY vs. +7.5% expected and +6.9% in Aug.
- China Q3 GDP rose +7.3% YoY vs. +7.2% expected and +7.5% in Q2
Upcoming Economic Calendar Highlights (all times)
- Australia RBA’s Lowe to Speak (0855)
- US Sep. Existing Home Sales (1400)
- Switzerland SNB’s Zurbruegg to Speak (1600)
- Japan Sep. Trade Balance (2350)
- Australia Q3 CPI (0030)