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China’s growth slowdown pressures the global economy

13 May, 2014

MARKET REPORT BY FOREXTIME LTD

The health of China’s economy has come under the spotlight in early trading this week with Chinese President Xi Jinping saying over the weekend that the market will need to adapt to a “new normal” rate of slower growth for China as, even though the country is still in a “significant period of strategic opportunity”, projections indicate the weakest expansion in China’s growth since 1990. This bold statement from the President had a negative impact on the Asian opening this week and investors are now keenly waiting for Tuesday’s release of industrial production and retail sales from China for signs of endemic weakness.

The Asian markets are in fact dominating the spotlight early in the week, with the yen dropping 0.1% after Japan announced a current account surplus of just JPY 116.4 bln, much lower than the forecast JPY 348 bln and a fraction of February’s figure of JPY 612.7 bln. This disappointing data is only further fuelling the belief that the Bank of Japan (BoJ) will have to expand their monetary stimulus by the end of 2014. The market is still yet to see what the full impact of the rise in sales tax will be and this will likely be the defining indicator of whether the BoJ is forced to increase the stimulus. Thursday will see preliminary GDP for Japan released which is likely to generate yen volatility. The USD/JPY pivot point is 101.94, with resistance levels at 101.98, 102.03 and 102.08; and support levels at 101.89, 101.85 and 101.80.

Meanwhile, Australia is bracing for the annual Budget announcement on Tuesday where the Government is expected to reveal a raft of spending cuts and new levies which aim to make up a A$123 bln shortfall over four years. This aggressive economic policy announcement is likely to make waves in Australia and may well prevent the Reserve Bank of Australia from raising rates in the short term. Traders should closely watch the Australian dollar for volatility before, during and after the announcement. The AUD/USD pivot point is 0.9370, with resistance levels at 0.9375, 0.9379 and 0.9384; and support levels 0.9366, 0.9361 and 0.9357.

The week ahead for the US includes a number of economic and corporate announcements that are expected to provide some USD volatility. Tuesday sees the latest month-on-month retail sales announced with a drop from 1.2% to 0.4% expected, followed by consumer prices and consumer sentiment data later in the week. No doubt the Federal Reserve is hoping that these figures will show some signs of positivity and the results are being eagerly awaited by those who are skeptical of the health of the US economy. If the data shows any sign of weakness or deterioration this may well call into question the decision to continue the current rate of tapering asset purchases. Thursday will see Federal Reserve Chairwoman Janet Yellen giving an evening speech on small business and the market will be looking to this speech for any indications of future monetary policy.

The euro dropped last week after European Central Bank President Mario Draghi indicated that he may announce easing as early as next month. As a result the euro is expected to maintain a downward pressure until the June meeting. This week sees preliminary data which will indicate first quarter growth and if this too is disappointing Draghi’s hand may be forced to concede that easing is necessary. The EUR/USD pivot point is1.3768, with resistance levels at 1.3775, 1.3782 and 1.3789; and support levels at 1.3761, 1.3754 and 1.3747.

Wednesday will see the latest monthly inflation report released by the Bank of England and with the UK unemployment rate falling below the 7% threshold in the first quarter, BoE Governor Mark Carney is expected to be questioned about his plans to raise interest rates. Although a rise in interest rates is not expected before Q1 in 2015, a series of strong data releases recently have led some analysts to believe that an increase may come as soon as the end of this year. GBP/USD pivot point is 1.6886, with resistance levels at 1.6901, 1.6911 and 1.6926; and support levels at 1.6876, 1.6861 and 1.6851.

WHAT TO WATCH THIS WEEK: AUD/USD should be closely watched during the Australian Federal Budget announcement on Tuesday and USD/JPY may provide some good opportunities, especially on Thursday when the preliminary GDP data is released. Yellen’s speech late on Thursday night should also be monitored as her comments have the potential to influence the performance of USD pairs.

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