IMF downgrades China's growth expectations for 2012; 2013 prospects are on similar track

By Sam Coxhead*:

Throughout the course of the last week, further evidence of the decoupling between the global risk appetite and the fortunes of the Australasian currencies developed.

The slowing of Asian growth indicators are providing the drag  for the closely correlated fortunes of the New Zealand and Australian export sectors.

With Chinese manufacturing continuing to contract with lower export demand, the wider region is increasingly feeling the pinch.

The IMF have downgraded Chinese growth expectations for 2012 to 7.8% from 8% in July, and 2013 prospects are on a similar track. 

In the US, the economy continues its grinding recovery with the unemployment rate surprisingly falling to 7.8% at last week’s announcement. Manufacturing numbers for September were stronger than expected and these results will be welcomed by the current administration as the elections loom on November 6.

Whilst the economic outlook remains bleak in Europe, the steps towards financial stability continue for the most part. This sees the EURO consolidate at levels considerably off the lows seen in the middle of this year.

The Bank of England (BOE), European Central Bank (ECB) and Bank of Japan (BOJ) all took a breather from further policy accommodation at their respective monetary policy announcements  last week.

Major Announcements last week:

·  Chinese Manufacturing 49.8 vs 49.9 expected

·  UK Manufacturing 48.4 vs 49.5 expected

·  US Manufacturing 51.5 vs 49.8 expected

·  RBA cuts cash rate .25% to 3.25%

·  Australian Retail Sales .2% vs .4% expected

·  ECB, BOE and BOJ all leave monetary policy unchanged as expected

·  Canadian Manufacturing 60.4 vs 59.2 expected

·  US Unemployment rate falls to 7.8% from 8.3% previously

NZD/USD 

The NZDUSD pair continues to trade within its increasingly familiar .8150 - .8350 range that we have seen for the last month. In the absence of domestic New Zealand data last week, the pair was driven by external forces. Lower growth expectations in Asia has undermined the demand for the NZ dollar. Also helping the US dollar demand was the solid Romney performance in the pre-election leaders debate in the US. However, following the RBA decision to cut its cash rate the NZD saw high demand again, the AUD and NZD demand has spilled over into other pairs, of which the NZDUSD was one. The strong US employment numbers again swung the bias in favour of the US dollar, and we see the pair towards the lower end of its recent range. A consolidated break of the .8150 support would enable another leg lower for the pair and would likely be led by another lowering of the AUD.

NZD/AUD (AUD/NZD)

The big news of the last week for this pair was the RBA’s partial surprise cut to its cash rate. This was enough to open up the way for a consolidated break of the resistance at .8000 (support 1.250), and heralds the entry to a new range in the short term at least. The simple concept of contracting cash rate differentials has driven the move. With this in mind any increased odds of a move lower in the NZ cash rate over the next six months would see the NZ dollar give up some of its gained ground. Whilst the odds of this remain relatively low at this stage, there has to be a time when a slower Australian economy starts to impact in New Zealand, as its largest trading partner. Expect the .8000 - .8100 (1.2500 – 1.2350) range to contain the price action in the short term.

NZD/GBP (GBP/NZD)

This pair remains in somewhat familiar territory, albeit the NZD was down towards the lower end of the recent range towards the end of last week. With the Asian growth profile remaining under pressure, expect to see the NZ dollar struggle with moves up towards the initial resistance at .5150 in the short term. Today’s NZ business sentiment data was of limited impact, and with a lack of top tier data in the UK this week, expect the recent .5050 - .5150 (1.9420 – 1.9800) range to contain the week’s price action. If the Australian dollar remains heavy, expect to see the NZ dollar dragged lower to test support levels.

 NZD/CAD

The NZ dollar saw some constant pressure from the Canadian dollar last week. The RBA cut to their cash rate helped drag the NZD lower and the better than expected Canadian and US employment data on Friday continued to increase the Canadian dollar demand. Today’s NZ business sentiment data was of limited impact and the Canadian trade balance numbers on Friday should also provide just passing focus. Recently the regional economic health has again risen to be the primary driver of the price action. With slowing Asian growth and the North American numbers managing to hold their track, further downside pressure on support levels for this pair can not be ruled out.

NZD/EURO (EURO/NZD)

The NZ dollar had mostly unrelenting pressure from a stable EURO last week to finish right on NZD support at .6250 (1.6000). The pressure on the NZ dollar has come from lower Asian growth prospects directly leaning on the NZ export sector. Indirect pressure also comes from the heavy nature of the Australian dollar in recent times. Much of the price action this week will be driven by the headlines in Europe. Expect Spain to remain topical and further pressure to come from the ECB on respective national leaders to continue with unpopular, but necessary policies to enable continental stability. Consolidation through the .6250 (1.6000) level is needed to open the way for further NZD downside moves. It is likely that such a move would occur in the presence of softer than expected economic indicators in Asia.

 NZD/YEN

This pair continues to trade within the familiar 63.50 – 65.50 range that we have seen for the last five weeks or so. Further jawboning efforts to talk down the YEN are keeping pace with the lower expectations for Asian growth that drag on demand for the NZ dollar. This week will likely see the range remain intact, today’s NZ business sentiment numbers and Japanese trade balance data have been of limited impact. Expect further efforts from Japanese officials to talk down the YEN to aid their export sector as BOK Governor Shirakawa is due to speak on three occasions this week.

AUD/USD

The AUD came under immediate pressure following the RBA’s somewhat surprising decision to cut the cash rate to 3.25% last week. The next material US dollar outperformance came following the US employment numbers on Friday when the unemployment rate dipped below 8.0% for the first time since early 2009. The pair opened this week and there has been a recovery of sorts from the Australian dollar. The AUD’s correlation to the Asian growth profile is providing the weakness, in the same way it has provided the strength over the previous couple of years. This week sees the Australian focus come in the employment numbers on Thursday. The US focus is secondary this week, but the consumer sentiment numbers on Friday and the ongoing run up to the November 6th Presidential elections will provide the lead. Consolidation through the stubborn support at 1.0150 is required for further attempts at the downside, but it seems like this initial support will provide harder work for the US dollar to push through than the lesser support levels above.

AUD/GBP (GBP/AUD)                            

The RBA decision to cut the Australian cash rate to 3.25% undermined demand for the AUD against the GBP last week. Softening the pressure on the AUD was the run of worse than expected economic data in the UK. After opening this week at four month lows, the AUD has seen a relief rally of sorts. The latest UK manufacturing production data comes later on today ahead of the September Australian employment numbers on Thursday. Expect the .6300 (1.5875) level to offer initial AUD support should the AUD come under pressure from the current levels. Until a pickup in Asian growth prospects is seen, any sustained AUD resurgence seems unlikely, especially in the short term.

 AUD/EURO (EURO/AUD)

The AUD saw steady pressure from the stablising EURO last week. The RBA decision to cut the cash rate started the weakness and this again accelerated following the stronger than expected US employment numbers on Friday. The AUD has bounced from the lows to start this week, and Thursdays Australian employment numbers provide the focus for the economic data. Topical headlines in Europe will also continue to provide a lead, with comments from ECB head Draghi and the Spanish debt markets being of particular focus. If any further AUD resurgence eventuates, the .7950 (1.2580) will provide a stern initial test. The AUD also remains vulnerable to weaker news from Asian trading partners, with China being of particular note.

AUD/YEN

This pair remains stuck in the 79.50 - 81.50 range that has become familiar over the last month. Further jawboning of the YEN lower from Japanese officials should prevent any material rally from the AUD from current levels this week. The Australian focus comes from Thursdays employment numbers, with a 5.3% unemployment number expected. The AUD remains vulnerable to weaker numbers emanating from crucial Asian trading partners. With both central banks taking material monetary policy actions, plausibly the current rangy nature of the price action will continue in the short term.

AUD/CAD

The RBA easing of the cash rate last week saw this pair pushed down to the lowest levels seen in over a year. Accentuating the move was Fridays better than expected Canadian data. This week is a little devoid of direct economic data, with only the Australian employment numbers on Thursday to offer any real direction. Expect any news on the Asian growth profile to materially impact demand for the Australian dollar. Current levels look to offer good value buying of AUD with CAD. Probability remains weighted against a material bounce in the AUD in the short term at least.

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Market commentary:

Throughout the course of the last week, further evidence of the decoupling between the global risk appetite and the fortunes of the Australasian currencies developed. The slowing of Asian growth indicators are providing the drag  for the closely correlated fortunes of the New Zealand and Australian export sectors. With Chinese manufacturing continuing to contract with lower export demand, the wider region is increasingly feeling the pinch. The IMF have downgraded Chinese growth expectations for 2012 to 7.8% from 8% in July, and 2013 prospects are on a similar track.  In the US, the economy continues its grinding recovery with the unemployment rate surprisingly falling to 7.8% at last week’s announcement. Manufacturing numbers for September were stronger than expected and these results will be welcomed by the current administration as the elections loom on November 6. Whilst the economic outlook remains bleak in Europe, the steps towards financial stability continue for the most part. This sees the EURO consolidate at levels considerably off the lows seen in the middle of this year. The Bank of England (BOE), European Central Bank (ECB) and Bank of Japan (BOJ) all took a breather from further policy accommodation at their respective monetary policy announcements  last week.

Australia

Last week the Reserve Bank of Australia produced a slightly surprising cut of 25points to a new cash rate of 3.25%. The interest rate market now sees a cash rate below 3.00% by the end of 2012. This move lower comes as a result of diminishing prospects in Asia reverberate through correlated trading partners. Retail sales figures later on in the week saw lower than expected activity in August and this reinforces the RBA cut to the cash rate. With the economy having been propped up by record mining infrastructure investment which is expected to peak next year, the RBA accommodative policy should start to stimulate activity in the wider economy by that time. This week’s focus comes in the form of the September employments numbers due on Thursday.

New Zealand

Last week saw little economic news released in New Zealand. The wider NZ dollar market saw periods of solid demand throughout last week. This demand was predominantly driven by the spillover from the surge in the NZ dollar over the Australian dollar following the RBA’s cut to the Australian cash rate. The NZD has risen through stubborn resistance against the AUD to break back into more historically average levels as the cash rate differential contracts between the two economies. This week has seen the focus turn to the quarterly survey of business opinion released this morning by the NZ Institute of Economic Research. This closely watched survey revealed a bounce in sentiment from -4 last quarter to +8 for the 3rd quarter.

United States

The news was mainly positive in the US last week. Improved manufacturing and services numbers were joined by current jobs growth as expected and a revision higher from the previous number. The result has been a surprising fall in the unemployment rate from 8.2% to 7.8% and the first month lower than 8% since February 2009. Also in a speech, FED chairman Ben Bernanke reiterated the FED’s commitment to maintaining low interest rates until the recovery gathers speed and speculation has increased that some numerical targets for policy adjustment maybe provided in the coming months. This week sees the usual slurry of economic data in the US, but the latest consumer sentiment numbers on Friday will be of particular note. The upcoming election will provide constant focus in the coming weeks and add further colour to a already dynamic financial market environment.

Europe

In Europe Spain apparently remains the focus. It seems unlikely that they will avoid having to ask for wider fund assistance. The economic indicators in wider Europe remain under significant pressure as the painful austerity measures continue to limit near term prospects. Unsurprisingly the ECB left monetary policy unchanged at this time, following the recent structural accommodations they have provided. Expect further pressure to come from the ECB on Governments to provide unpopular support if required. Industrial production numbers provide the economic data focus, whilst further EU meetings and a speech by ECB president Draghi will be closely followed.

United Kingdom

Last week in the UK saw slightly softer than expected manufacturing, services and construction numbers emerge alongside the expected unchanged monetary policy announcement from the BOE. Credit agency Fitch also warned that the UK could lose their AAA credit rating as rising debts and a slowing economy threaten already weak national accounts. This week sees manufacturing production numbers the focus on Tuesday, while the G7 meetings on Thursday will also be watched for any potential developments.

Japan

Last week saw no change from the BOJ at their monetary policy announcement. This was widely expected following their recent policy adjustments and was joined by a downgrade of forecasts for activity in 2013. Continuing rhetoric from various BOJ and Ministry of Finance officials about the continuing strength of the YEN not matching fundamentals has kept the lid on further YEN gains in the short term. Of help will be the progress being made in Europe as well, and the apparently imminent approach from Spain for assistance should reiterate the structural recovery in Europe. With the limited economic data in Japan this week expected to have little impact on demand for YEN, expect the wider market sentiment to provide the lead for the YEN for much of this week coming.

Canada

In Canada last week the manufacturing, construction and employment numbers were all above the market’s expectations. This has helped buoy demand for the Canadian dollar, which also saw assistance from the stronger US data. This week sees the focus come on Friday with the release of the trade numbers.

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Sam Coxhead is a currency analyst with DirectFX You can contact him here >>