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The Worst Casualty of Bad Chinese GDP Data

Borisb Schlossberg

A number of major currencies were roiled today by China’s Q1 GDP data, which fell way short of expectations, but among the losing currencies, none fared worse the Australian dollar (AUD).

Risk currencies came under heavy assault on the first trading day of the week after China's Q1 GDP data badly missed expectations, raising fears of a global economic slowdown. The latest data from China disappointed the markets, with GDP printing at only 7.70% versus 8.0% expected.

The fall in Chinese GDP was attributed primarily to lower consumption in the wake of a government crackdown on luxury spending, as well as a slowdown in property investment and FAI growth as credit conditions tightened. The news sent USDJPY tumbling through the 98.00 figure as the pair tripped stops all the way to 97.55.

The sharp decline in yen crosses also dragged EURUSD and GBPUSD lower, but the biggest high-beta victim of the night was the Australian dollar (AUD), which broke the key 1.0450 support versus the US dollar (USD) and remained moribund near the 1.0400 figure for most of this morning’s European dealing.

There was some speculation that the weaker-than-expected Chinese economic data may have understated the pace of activity so that the new Chinese regime could set a lower a benchmark for growth for the rest of the year. However, even if the data was guided lower, it nevertheless confirms that global growth in Q1 is slowing markedly. With both China and the US missing expectations, the estimates for global growth may now be revised downward.

Whether this is merely a pause or the start of a more malignant problem for the global economy remains to be seen, but it is not surprising that Aussie, which is the key barometer of risk appetite, has reacted so negatively to the news.

In fact, the whole commodity currency block, which only last week was setting fresh monthly highs on the back of renewed demand for the carry trade, has now seen a very sharp correction as gold, silver, and oil all continue to tumble. If risk-aversion flows continue to accelerate in North American trade, AUDUSD could break the 1.0400 level and test the key 1.0350 support.

See also: 2 Major FX Showdowns Happening This Week

Despite the correction in high-beta names, the EURUSD has actually managed to show some relative strength. It was lower, but held above the 1.3050 support level while boosted by strong Eurozone trade data, which printed at 12.0B versus 9.9B expected.

Despite the generally horrid economic results from the region, the EURUSD has held up well over the past several weeks, although the recovery rally has stalled at the 1.3150 level.

With no meaningful action from the G-20 expected this week, it is difficult to imagine any pick-up in Eurozone economic activity, and perhaps the best that can be hoped for is a stabilization of conditions as growth turns less negative. However, given the parabolic rises in the commodity dollars last week, even such modest expectations could provide EURUSD with an edge this week, and the pair could show some relative strength on that front as the week progresses.

By Boris Schlossberg of BK Asset Management

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