AUD/USD – 1 Month Low with Slower Chinese Manufacturing PMI

China’s manufacturing sector growth slowed down to a screeching halt, with HSBC PMI Manufacturing showing a mere 50.5 read vs 51.6 in March. The export sub-index for April came in at 48.6 vs 50.5 in March, in line with the shrinkage seen in official export figures released 2 weeks ago. Similarly, this data also accurately reflect the slower than expected GDP released last week, which came in unexpectedly at 7.7% for Q1 2013 versus an expectation of 8.0% growth.

All these point to a weakening global demand that was slated to improve in 2013. Most if not all of the G20 nations have been revising their 2013 growth rates lower, a move mirrored by IMF and also various prominent research houses. However, in the past we could expect the Chinese government to step in almost immediately to stimulate the market via repo repurchases, we are unlikely to see similar actions this time round. PBOC Zhou came out yesterday and declare that the slower growth rate is “normal”, as China need to restructure its economy in order to continue growing in the future. This is akin to the Chinese saying “休息是为了走更长远的路”，which loosely translates into “Long journeys requires much needed rests”. Just as F1 formula cars that require regular pit stops, the strong engine of China’s economy need to rest to prevent a total burn out. And current economic climate would actually be the best time for China to take the pit stops. In competitive racing, pit crews plot out the best timings for their drivers to enter the pit after evaluating competitors’ current lap, speed, and current opening. One common strategy is to recall cars back to the pit when the safety cars are out (due to accident on track) as racers will have to slow down behind these slower safety cars while the rescue crew clear the race track. This would be the best time for drivers to get their cars refueled, tires changed, tweaks be done for a faster lap after the safety cars are gone.

This is exactly the current situation of the global race track for countries right now. With so many wreckage in sight, China has chosen the best time to pullback it’s economy to start morphing itself into a truly first world economy. This include allowing Yuan to be freely traded, lowering protectionistic polices (e.g. tariffs and taxes) and improving its labor force. With everybody else growing at such slow speed, China will be glad to know that it will not be left disadvantage while its economy is in the pits. At the same time, there is the benefit of cooling house prices with its economy slowing down, which will go a long way to prevent bubbling effect on its economy.  If China managed to do this right, the future will certainly be bright.

Hourly Chart

All those mentioned above will be scant comfort for AUD/USD though, which rely heavily on China’s imports. A slow down in Chinese economy will certainly result in lower Australian exports into China. With no stimulus in sight, and a few years to go before China can reap the economic benefits of the restructuring, Australia economy will similarly follow China into the pits not by its own choosing.

AUD/USD fell to below 1.025 with the news, and extents the downtrend that we’ve seen since 11th April. Following the quick bearish momentum that saw price falling from just under 1.06 to 1.03, subsequent recovery/correction only served to enhance the underlying bearish sentiment with lower highs and lower lows. Currently Stochastic reading is just entering the oversold region, and suggest that price could still head slightly lower, potentially finding 1.02 as support.

In order to negate current bearish pressure, price need to break 1.04 in order to break current sequence of lower highs and lower lows, but to do this bulls will need to clear numerous resistances to get there. Furthermore, even simply negating current bearish continuation does not mean that price will simply fly above 1.04. The downward pressure would have eased a little, but the sell-off from 1.058 will still be in play.

Daily Chart

Looking at the daily chart, price is seeking to retest Feb’s low of above 1.01. We’ve just broke the 38.2% Fib retracement and acceleration towards 1.01 may happen especially if 1.02 is breached. Overall the technical outlook for AUD/USD fits with the long term fundamentals – Techincals suggest that a sideway trend may be on going, which suggest that a long-term rebound towards 1.06 may be possible if current trend persists. This is similar to the fundamental outlook for China which suggest that China’s growth rate may remain low for now, with a much stronger future ahead which will certainly benefit Australia and AUD. That being said, there are many other factors involved and the long-term outlook may change dramatically, hence traders should still keep a look out for potential breaks below 1.01, or a move back above 1.03 that will open up 1.06 earlier than expected.

More Links:
AUD/USD – Continues to Drift Lower Below 1.03
EUR/USD – Waiting for Direction Around 1.3050
GBP/USD – Rallies Back Towards 1.53

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