Morning Fundamentals: China Showing Signs Of Slowing Momentum

Catching our attention for the new financial year is the China and Japan story due to the fact that their economic health may have significant impact on the Australian economy. First up is China’s monthly Purchasing Managers Index (PMI) where it showed a result of 50.1 for June against 50.8 in May. The PMI is a leading indicator of economic health and is based on surveyed purchasing managers in the manufac-turing industry. A result above 50 indicates economic expansion but comparing to previous results it has shown that China’s growth has held below 8% for the past four quarters, the first time that has happened in at least 20 years. In addition, The World Bank lowered its 2013 expansion forecast for the nation last month to 7.7% from 8.4% previously.

Next up is Japan and its Tankan result. The Tankan data is released quarterly and like the PMI, it is a leading indicator of economic health in Japan. For this quarter it showed a result of 4 compared to 3 for the last quarter. What this means is that big Japanese manufacturers are optimistic for the first time since September 2011, indi-cating confidence in Prime Minister Shinzo Abe’s reflationary policies.

The reason why we address these two countries today is to highlight their importance in the Asia-Pacific region. At a time when China is showing signs of slowing momentum, Japan’s recovery is extremely crucial to the Asia-Pacific outlook including Australia’s. Perhaps this may explain a strong bounce in the AUD from its lowest lev-el in three years.


EUR/USD continues to trade around the mid point of the bull run that started back in May to late June. The 1.3000 handle has been proving a solid base at present but will this last in the wake of expected building momentum and longer term expectation that US QE will be reduced in the near future. European and US data balanced each other out over the last 24 hours and with the market keeping in this wait and see mode, its hard to see anything much happening till about Wednesday. The slow climb off 1.3000 was mirrored in a lot of currencies with AUD and Kiwi, seeing the benefits also. However, offers from expecting bears capped the rise just ahead of the downtrend resistance, which comes in at 1.3080 and looks to end about 1.3105. Should this level break of some positive European news we could be in for another run of positive momentum but we will wait and see on that front. Data wise theres not much on the calendar for today.

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AUD/USD woke up on Monday morning with what looked two black eyes and a nasty hangover, as the pair was sitting just above the 0.9010 handle. The lowest point since September 2010 is a far cry from 1.10 levels of just last year or even the 1.03 levels of just two months ago. The slow climb off the bottom yesterday has been helped by some positive data in Europe and as expected in China. By the end of the Asia session the price had reached 0.9200 with local traders willing to jump in and buy AUD as they believe with AUD down here the RBA can easily remain on hold for another month. The current 2.75% does look likely to change but not this month, more likely September or October, if needed.

RBA Tuesday is here with this likely to cause a spare out in the market from about lunch time with only 25% of a cut priced in the markets should be happy to wait. A hold and wait signal from the RBA should see the price jump the short term resistance and retest the 0.9350 cap.

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BULLISH NEUTRAL
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