China Slows, Aussie Hits Fresh Lows, Will Fed Delay?

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Market Drivers July 24, 2015

Chinese Man. PMI Falls to 48.2 sending AUD to fresh multi-year lows
EZ Flash PMI in July slows
Nikkei -0.67% Europe 0.22%
Oil $48/bbl
Gold $1082/oz.

hope but
Europe and Asia:
CNY 48.2 vs. 49.8
EZ Flash PMI 52.2 vs. 52.5

North America:
USD New Homes Sales 10:00

A very sharp drop in Chinese Manufacturing data sent Aussie tumbling to fresh multi year lows in Asian session trade today as market players feared the prospect of a hard landing in Chinese economy that would be very damaging to the export dependent Australia.

The Chinese PMI data printed at 48.2 versus 49.8 – plunging deeper into contractionary territory and sent tremors throughout the currency market. This was the weakest reading in more than a year indicating that Chinese growth led by its manufacturing sector is clearly slowing. Although Chinese authorities have long tried to pivot the Chinese economy towards more services and consumer spending those sectors remain relatively immature and the shift is likely to take years rather months providing little help to the policymakers.

The slowdown in China is concerning not only to Asia which greatly depends on Chinese demand, but also to US policymakers as well. Despite relatively buoyant US economic growth, the Fed may be loathe to hike rates in September if it sees Chinese demand sharply contracting fearing that any US tightening could have negative consequences for global growth.

In the near term however the greatest negative impact of the slowdown in China has been felt in the Aussie which dropped below the .7300 figure tonight for the first time since 2009. The markets are rightly fearful that the sharp falloff in demand for Australian iron ore deposits is not only going to cause a sharp contraction in the country’s mining sector but could have highly damaging consequences on the term of trade and the Australian budget.

Over the next few months the market is likely to focus with much greater intensity on those two reports as it tries to ascertain the economic damage done to Australia. With macro factors now squarely aligned against it, some analysts are predicting that the Aussie could eventually fall to .6500 making a perfect round trip to its lows from the highs of 1.1000 seen just a few years ago.

Elsewhere today, the EZ PMI data came in a little softer as well with French Manufacturing PMI dropping just below the 50 boom/bust line once again. The euro drifted lower but found support ahead of the 1.0925 level as markets looked past the data. With the Greece saga sidelined for now traders are hoping that business conditions in the region will improve, driven by lower energy costs, supportive policy from ECB and a greater sense of confidence amongst investors.

The euro continues to consolidate in the 1.0800-1.1000 region for the time being and the pair may be basing for a counter trend rally especially if the Fed shows any hesitation to hike rates in September due to concerns about China.

Boris Schlossberg
Managing Director

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