Market Drivers Aug 27, 2015

China Soars fueling risk on flows
Market eyes US GDP
Nikkei 1.08% Europe 3.14%
Oil $40/bbl
Gold $1125/oz

Europe and Asia:
AUD PCE -4.0% vs. -2.5%
EUR Money Supply 5.3% vs. 4.9%

North America:
USD GDP 08:30

USD Pending Homes 10:00

Chinese equity markets came roaring back to life jumping as much as 6% in less than 45 minutes in afternoon trade which helped rally risk FX in early European dealing. The euro continued its massive unwind dropping through the 1.1300 figure in mid morning trade as equity markets continued to rally.

The pair has now made a full round trip giving up all of the gains of the past 72 hours as it completed one of the most volatile periods in its life rising and falling more than 500 points this week.

The stabilization in Chinese equity markets provided a note of relief to other currencies with Aussie breaking higher towards 7200 level after being battered down almost to 7000 over the past few days. The economic news from Down Under was not positive with Private Capital Expenditures dropping by a whopping -4.0% versus -2.5% eyed. That a decline of -10.0% on an annualized basis and show the huge impact of contraction of mining on the Australian economy.

Still while the headline data was horrid the forward estimates were actually a bit higher than expected and with Chinese equities soaring the market chose to ignore the numbers and focus on risk appetite flows. The selloff in Aussie has been so sharp over the past several months that the unit is now priced for a very severe recession in the country, and while growth has certainly slowed Australia shows little signs of slipping into contraction. Furthermore, with the unit well below the RBA’s target of 7500 cents the central bank appears to have little appetite for further rate cuts for the time being. That could make Aussie an attractive carry trade once again if risk sentiment stabilizes into the end of the year.

In North America the focus will be squarely on US GDP data. Although the GDP news is backward looking measuring activity in Q2 of this year, it takes on an extraordinary importance today in light of the recent market turbulence and fears that the Fed may remain stationary through the end of the year. The market is looking for a reading of 3.2% versus 2.3% the quarter prior and any beat would likely help fuel a further rally in stocks and take EUR/USD towards the 1.1200 level while pushing USD/JPY towards 121.00. However if the news disappoints it could trigger yet another round of risk aversion and reverse all of the moves in overnight trade.

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