Release: China GDP q/y (4Q) Consensus Forecast: 8.7% (annualized) Previous: 9.1% (annualized) Date/Time: 1/16/12 9:00PM ET (2:00 GMT, 1/17/12)
China's Growth Key to Aussie's Prospects
A key to watch to begin the week will be the release of GDP data from China. This would be especially important for risk sentiment in the commodity space and the commodity currencies that are closely linked to China's growth and trade - namely the Australian and New Zealand dollars.
The expectation is that growth will cool in China to an 8.7% annualized pace in the fourth quarter from a 9.1% pace in the third quarter, continuing a trend of deceleration in China's GDP.
At the same time, the shadow banking system is becoming an increasing worry and the loans given out to local governments in the 2008 period are starting to show a high percentage of delinquencies, which creates the possibility of Chinese authorities needing to bailout its banking system.
Chinese authorities have shifted their focus from battling inflation which has peaked according to official statistics and are now honed in on boosting growth prospects. Therefore the data that comes out in upcoming Asian trading session will be key for policymakers in China on whether to move forward with further easing of monetary policy.
3 Scenarios for the 4Q Chinese GDP Release:
1. Stronger-than-expected Scenario - GDP At 9.0%:
If growth beats expectations/forecasts it will have a two-fold impact. First, it means that China's economy is not slowing as quickly as feared, which means that demand for commodities and goods from abroad will continue to be strong in the first quarter. This should be a positive for Australia which supplies many of China's imports. At the same time it could lessen the need for Chinese authorities to undertake loosening of monetary policy such as dropping the reserve ratio requirement which may actually be interpreted as a risk-off development.
Overall, this scenario should help the Australian dollar gain against the USD and others as it boosts risk-on sentiment as the thinking is growth is stronger AND that any softening in growth will be followed by looser policy. We would be watching the 1.0375 area in the AUD/USD as a result and a break there would create the conditions for further gains to the topside (see AUD/USD below).
2. Status Quo Release - GDP at 8.7%:
If GDP comes in around the expected 8.7% annualized rate it will show that China's growth is in fact cooling and that is negative for risk sentiment. At the same time it does increase the chances that Chinese authorities will undertake further easing - a positive for risk sentiment. Therefore, the likeliest outcome for the AUD/USD would be either sideways trading or slightly negative sentiment with the range established on Friday between 1.0 360 at 1.0 225 likely hold, while traders anticipate some move from the PBOC.
3. Weaker Than Expected Release - GDP Below 8.7%:
If GDP comes in weaker than 8.7% then Chinese authorities have a problem on their hands and will take the steps necessary to lower their reserve ratio requirement and continue to do so throughout 2012 as conditions warrant. Initially the news should be seen as increasing risk aversion with the AUD/USD moving in favor of the greenback, perhaps testing Friday's lows near 1.0235. At the same time since this scenario opens up the possibility of an immediate move by the Chinese authorities we should be cognizant of a snap-back in favor of the AUD if the reserve ratio requirement is in fact lowered by the People's Bank of China.
Overall though, if China's growth is slowing, problems persist in the euro zone and if we see US economic activity cooling - jobless claims and retail sales figures last week were our first inkling of this - that could provide the global conditions for weaker commodity prices and a weaker Australian dollar.
AUD/USD - Chinese Growth Key to Direction for Aussie
Here's a look at the AUD/USD pair in the 1-hour timeframe.
Over the last two weeks, the pair has had a generally bullish leaning as it trades above the 200 EMA, but there is important resistance levels at 1.0367 and 1.0378. The pair has set two lower highs so far and if another lower high is established following the data that that could be the beginning of a down spell for the Aussie.
Zooming out to the 4-hour timeframe we see an upward sloping support trendline currently holding the bullish case, while we again look at the 1.0377 area as key resistance. These two levels form an ascending triangle type of pattern and we are looking for either a break to the topside to give us further bullish action or a break of our support trendline and then the 200 EMA for a further move to the downside.