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AUD/USD en-route to 0.90 after poor China data - Westpac

FXStreet (Bali) - Jonathan Cavenagh, FX Strategist at Westpac, reviews the latest disappointing Chinese data over the weekend, noting that we could continue to see softer data momentum for a number of weeks, while addign that the AUD/USD looks to be headed towards 0.90 early this week.

Key Quotes

Over the weekend, China released IP, fixed asset investment and retail sales data for August. All prints came in weaker than expected but the very sharp deceleration in year-on-year (yoy) IP growth will draw the most attention. IP rose just 6.9% versus 8.8% expected and a 9.0% print in July.

Our China data pulse fell to 38.9% at the end of last week, which is well down from the +75% level we saw in June but still above the 20% trough we saw in February of this year. Hence we could continue to see softer data momentum for a number of weeks before we reach a point where can say more confidently that a lot of ‘bad news’ is now priced into the short term China outlook.

Year-on-year IP growth is now at its weakest pace since late 2008 and electricity output, which is considered a bell weather indicator for the economy, fell for the first time in yoy terms since early 2009. This will heighten fears of a sharp slowdown in growth for Q3, with the risks around a ‘hard landing’ likely to be mentioned with increased frequency over the coming weeks.

The weakness in the August indicators is in line with the slump in the iron ore and rebar prices through August. This trend has continued into September although we have seen some stability emerge in recent sessions, particularly in terms of iron ore prices. However, sentiment is once again likely to be tested in the early part of trading this week.

This will have flow on effects to commodity sensitive currencies like the AUD, with the weekend China data only adding to the bearish sentiment. A test below 0.90cents seems all but assured in the early part of trading this week. From there the market may look to push the currency towards the low 0.89/high 0.88cent region (although much is likely to depend on what the FOMC says later in the week).

There will also be flow on effects to Asian currencies, with some of the more commodity sensitive currencies like MYR and IDR at risk of further weakness against the USD. Indeed, since the USD rally started at the beginning of Q3, both MYR and IDR have outperformed most of their Asian peers. 1 month USD/MYR could push towards the 3.24/3.25 region, while an equivalent level for USD/IDR would be to push towards 12100/12200, (i.e. the highs from late June). USD/CNH should also find a base ahead of the low 6.1300 region. A push back towards the 6.1600 level is possible, particularly if the broader USD trend stays positive.

A circuit breaker could come via fresh policy stimulus announcements from the Chinese authorities. However, this seems unlikely, at least in the near term. Last week, at the World Economic Forum, the Chinese Premier appeared to distance the authorities from any near term actions. Of course, the chorus of voices calling for fresh stimulus measures (interest rate cuts, RRR cuts etc) is only going to grow louder after the weekend’s data outcomes.

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