AUD/USD – Lower on Chinese Producer Price Index

The latest inflation data from China shows the worst combination that Central Bank PBOC could ask for. Jun’s Consumer Price Index came in at 2.7% Y/Y vs an expected 2.5%, and higher than previous month’s 2.1%, while Producer Price Index came in at -2.7%, below expected -2.6% but slightly better than previous month’s -2.9%. This puts PBOC in a very difficult dilemma, as China’s economy has been slowing down significantly in the past few years – a result of global economic slowdown, and also China’s own initiative to let the economy slide in a bid to achieve economic reforms, and lower its inflation rates.

However, this latest round of inflation data showed that PBOC is far from achieving what they want. Consumer inflation rates remain high, while the worse than expected PPI suggest that the economy is deteriorating faster than what they expect. PBOC is hence caught between a rock and a hard place – slow down the slide with intervention, and consumer inflation may go up even higher. Leave things as it is, economy will go deeper into the red without any significant improvements on inflation. There is no easy solution to this problem, and either way, PBOC loses.

Hence it is not surprising to see AUD trading lower following the news announcement, as woes in China will almost certainly mean woes in Australia’s economy considering the sheer reliance of China on Australian exports. Interestingly, Credit Suisse’s Overnight Index Swaps which measures the probability of a 25bps rate cut by RBA in August jumps to 58% following the news, from a prior 47%. This suggest that the bearish pressure on AUD/USD will be higher, and there may be more speculative play towards the downside as traders begin to front-run an RBA rate cut scenario.

Hourly Chart

From a technical perspective, AUD/USD is already under bearish pressure before the PPI numbers were released. Stochastic indicator is undergoing a bearish cycle, while price action suggest that a break of the 0.912-0.914 consolidation zone has occurred, which opens up 0.904 as potential bullish target. There is still a possibility that 0.912 can be retested again, but if price is unable to trade higher than 0.914, technical pressure will continue to remain on the downside. Even if 0.914 is broken, 0.918 will provide further resistance, and subsequently 0.926 – it will be a tall order for price to breakthrough on the bullish front, and certainly fundamentals isn’t helping.

Daily Chart

From the Daily Chart, it is interesting to see price trading in a very tight descending channel. With price trading close to Channel Top, it is another affirmation against short-term bulls – favoring short-term bears for a move back towards Channel bottom. Stochastic readings on the Daily Chart is flat though, suggesting that a bullish break into the wider channel is possible especially if a Stoch bullish cycle has been established. However, given historical price action within the wider Channel, it is likely that price may not reach Channel top, and falter around 0.932 (swing high of 27th June and swing low of 12th Jun). This once again is in line with the short-term outlook which asserts that bulls will face numerous resistances, and a bullish breakthrough will perhaps need something extra ordinary which would be unlikely given current economic backdrop.

More Links:
AUD/USD – Moves Back Above 0.91 in a Small Sign of Life
EUR/USD – Rallies Off Long Term Support Level at 1.28
US Market Roundup – Stabilizing in wait for earnings season

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