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China data disappoints as markets look to central banks
00:00, 10 September 2012
The market reaction to last week's disappointing US jobs report appears to be predicated on the belief that the Federal Reserve will come riding to the rescue later this week with further measures to boost a slowing US economy. It appears to be a similar story with respect to the Chinese economy with any hopes of an improvement in Chinese data being dashed at the weekend when industrial production for August dropped to 8.9%, the lowest level since 2009, as exports growth continued to slow. The latest trade data for August also showed a surprise drop in imports of 2.6%, suggesting that domestic demand remains weak. Even though inflation remains low there remains some uncertainty as to how far the Chinese leadership will be able to go in stimulating domestic consumption, given concerns about elevated property prices, and a concern that inflation may have bottomed. Even so markets will be looking ahead to this week’s FOMC meeting where markets have pretty much priced in the likelihood the Fed will once again dance to the markets tune and commit to further QE. In so doing they will have to admit that “Operation Twist” has been a complete failure; given that it is not due to expire for another 4 months. It is still very possible and more likely that the Fed may not ease at all, and simply extend their low rate guidance beyond the current 2014, and into 2015. If the Fed does decide to stay its hand one only has to look at oil prices to understand why, given the current level of oil prices, near three month highs. If that wasn't enough, Europe also remains firmly n the spotlight despite the euphoric response to the pledge by the ECB last week to intervene in an "unlimited" fashion to push bond yields lower for countries who comply with set terms and conditions. The key events this week include the ruling of the German constitutional court on the legality of the ESM and the fiscal pact, with widespread optimism that the court will rule in its favour on Wednesday. The worry is that even if the court does rule favourably they could well add a whole host of conditionality to any request to the fund, thus making any such aid request extremely time consuming. On the same day the Dutch general election also takes place where the likelihood of an inconclusive result remains high given that scepticism about events in Europe and the increasing costs of bailout measures has raised concerns amongst voters in the country, where the economy is stagnating and private sector debt is high. Despite all the concern about Spain and Italy the problems in Greece continue to simmer away in the background with reports that the “troika” have rejected some of the measures outlined by Greek politicians designed to cut spending as part of their latest bailout plan. EURUSD – Friday’s price action saw 1.2650 taken out along with 1.2750 as the single currency soared towards trend line resistance at 1.2855 from high this year at 1.3485. This level also coincides with the 200 day MA at 1.2840. Given the strength of Friday’s move it would not be a surprise to see pullbacks from these levels back towards 1.2650. Key trend line support from the 1.2045 lows now lies at quite some way back at1.2450, while above that we also trend line support at 1.2520 from the 22nd August lows at 1.2435. GBPUSD – we saw the pound push back above 1.6000 on Friday and come within a short distance of the 1.6060 area, touching 1.6035 before drifting back. Above 1.6060 has the potential to target 1.6175 trend line resistance from the 2011 high at 1.6745. Trend line support comes in at 1.5865 from the August lows at 1.5490. Only a break below 1.5860 has the potential to target 28th August lows at 1.5755. The long term trend line support lies at 1.5575 from the 1.5240 lows. EURGBP – Friday’s break out saw the single currency quickly push up to the 0.8000 level and could well see a move towards the 0.8100 level and July highs, in the coming weeks. The 0.7950 level should now act as some degree of support along with the 0.7880 level. A break below the 0.7880 level has the potential to retarget the 0.7820 area, while on the upside a move above 0.7965 targets a move to 0.8000. USDJPY – the failure to sustain a move above 79.00 at the end of last week saw the US dollar slide sharply back towards the 78.00 level before rebounding off trend line support at 78.05 from the May lows. It has so far managed to stay above the trend line support at 77.65 from the all time lows at 75.35 which remains a key level and obstacle to further declines. We need to get back above the 200 day MA at 79.31 to target a return towards the highs last month.