Market Drivers for September 15 2014

Aussie slides below 9000 as Chinese data slumps

EZ Trade 12.2B vs. 15.9B

Nikkei closed Europe -.07%

Oil $91/bbl

Gold $1236/oz.

Europe and Asia:

CNY IP 6.9% vs. 8.8%

CNY Fixed Asset 16.5% vs. 16.9%

CNY Retail Sales 11.9% vs. 12.1%

EUR EZ Trade 12.2B vs. 15.9B

GBP Rightmove HPI 0.9% vs. -2.9%

North America:

USD Empire State 8:30 AM

USD Capacity Utilization 9:15 AM

With Japan closed for a holiday trading in the currency market was relatively subdued on the first session of the week, with the exception of the Australian dollar which slid to fresh multi month lows after China released very weak economic data over the weekend.

On Saturday China reported its Industrial Production and Retail Sales numbers and both releases missed its estimates by a wide margin. Chinese Industrial Production grew only at 6.9% pace versus 8.8% eyed while Retail Sales rose at 11.9% versus 12.1% forecast. This was the weakest reading for Chinese manufacturing growth since 2009 and the biggest one month falloff in the pace of production since 2008.

The data clearly suggests that Chinese growth in Q2 of this year has slowed materially and the situation may be further aggravated by the PBOC which refuses to lower the reserve requirement levels for banks because it feels that such policy moves simply misallocate capital to the real estate sectors rather than spur investment in small business and agriculture.

The Chinese data knocked Aussie for another loop sending the unit below the key 9000 level but as the night wore on it finally found some buyers at 9985 and rebounded back through the figure. The weak Chinese data certainly does not bode well for Australian mining sector demand, but as we pointed out last week the Australian economy appears to have have rebalanced itself as growth in jobs this year points to steady expansion.

The Aussie has also been the prime victim of the unwind of the carry trade as speculative capital flows have shifted into the US dollar on the assumption that Fed rate hiking cycle is about to start. Market expectations are so high for a more hawkish stance from the Fed, that there is now a big risk of a dollar selloff if the Fed does not change its message materially at the FOMC meeting this Wednesday.

Anything short of an unequivocal signal that the Fed intends to raise rates by H1 of 2015 could trigger a profit taking rally in the dollar with USD/JPY trading back to the 106.00 level while EUR/USD could pop back above the 1.3000 figure. Meanwhile, the US calendar only carries Empire State and Capacity utilization numbers today with markets anticipating slightly better results for both. USD/JPY has stalled ahead of the 107.50 level for the past few days and unless the data beats handily, the pair could drift towards 107.00 on profit taking as the day proceeds.

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