China fears reemerge on trade shortfall

Pessimism surrounding China's growth sustainability pressured global markets on Friday after the latest trade data failed to keep pace with expectations. Exports of Chinese goods and services rose 1.0 percent annually in July from of 11.3 percent in June, while imports rose at an annual pace of 4.7 percent, down from 6.3 percent. The trend of subdued domestic demand was also made apparent with the release of new loan data, which showed bank lending slid 41.3 percent in the month of July. Overall, China's trade surplus shrank to $US25.15 billion in July from 31.72 billion in June.

While a moderation in export activity reflects the persistent drama's resonating from the Euro area, subpar imports to the region may suggest recent easing initiatives by the Peoples Bank of China have yet to infiltrate domestic demand. Recent consumer price data may have shown an inflation environment worthy of further policy easing; however it's also clear the world's second largest economy faces considerable challenges unrelated to domestic policy, as Eurocentric concerns continue to slow the pace of exports to the region. Friday's trade data showed exports to Europe slumped 16 percent in July from a year earlier. This now places further pressure on government and monetary authorities to boost domestic demand with new fiscal and monetary policy initiatives. The choice of stimulus may take on a wider scope, with the government expected to embark on new infrastructure investment, in conjunction with traditional easing tools such as decreasing banks reserve ratio requirements and further interest rate cuts.

RBA shines light on A$ strength

For those who perused through the Reserve Bank's latest Statement on Monetary Policy may have noticed a spike in the number of references to the strong Australian dollar. In what resembled an attempt to verbally intervene, the statement highlighted the resilience of the dollar despite a marked deterioration in global growth expectations and underlying fundamentals, while attributing strength to foreign demand for the relative safety of highly rated Australian dollar securities. The bank also acknowledged the role a strong currency has played in dampening domestic growth and weighing on non-resource industries and employment. In short, the RBA now considers the high exchange rate poses "important risks" to the domestic economy, which represents a material shift from previous correspondence which has downplayed these risks, while encouraging affected industry to focus on ways of boosting productivity.

An alternate view

The Australian dollar has diverged significantly from our most exported commodities such as iron ore, which has recently tumbled to 2 ½ year lows while the Aussie dollar remains steadfast. While we can demonstrate the dollar is out of sync from a fundamental perspective, it's also worth considering the Australian dollar's traditional ties to risk barometers such as U.S equity markets. Both the Australian dollar and S&P500 fell to their respective 2012 lows in early June. Since this time the S&P500 has rallied near 10 percent, while the Australian dollar has gained close to the 9 percent region, which demonstrates the dollar's resilience is not as out of character as some would suggest. While there's no question the dollar's appeal has strengthened due to its relationship to fundamentally sound economy, this correlation suggests there's more to dollar strength than relative safety of highly rated Australian dollar assets and central bank demand. As has been the case in recent years, the premise of stimulus (more specifically quantitative easing) has at times been a pillar of support for U.S markets and indeed a current supportive factor for European markets. Firstly, this serves to weaken the U.S dollars safe-haven appeal as risk assets move higher and most importantly undermines the greenbacks value given its natural inverse relationship to stimulus.  In short, stimulus or expectations of stimulus is the U.S dollars kryptonite.

The Week Ahead

With little in the way of top-tier directives from a local perspective, we expect any major shift in price action to be driven by global risk trends. Although we can demonstrate an increase in offshore flows have provided a positive backdrop, the Aussie dollar remains very much a 'risk currency' in speculative terms, therefore any major shift in risk trends will continue to govern short-term price action. Local mid-tier releases this week include NAB business confidence, Westpac Consumer confidence, and average weekly wages.  Assistant RBA Governor (Financial Markets) Guy Debelle will also speak on Thursday.

The U.S week ahead will see the release of consumer price data add some spice to the QE3 debate, with headline inflation expected to moderate to a yearly pace of 1.5 percent in July from a previous 1.7 percent, while core inflation will probably remained unchanged at 2.2 percent. Also in focus this week are data points on the health of U.S retailers, Industrial production, Philadelphia Fed manufacturing Index, and consumer confidence data from the University of Michigan.

Across the Atlantic, the spotlight will be on Tuesday's release of preliminary GDP for both Germany and the Euro-Zone. Thursday's Euro-Zone consumer price data will no doubt spark further debate over the likelihood of near-term interest rate cuts, with headline inflation expected to fall 0.5 percent in July to represent annual inflation growth of 2.4 percent - unchanged from June. August is a month of rest and relaxation for Europeans which is expected to see lighter than usual liquidity govern market direction. With politicians and central bankers out sunning themselves on their yachts or luxury destinations, the lack of unscheduled news flow may act to keep conditions fairly subdued, barring any upsets from scheduled releases globally.

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