The Federal Reserve launched on Thursday its new round of Quantitave Easing as an open-ended program, China's economy is landing not as soft as market expected and, meanwhile, the EuroZone is not fixed yet.
The Market reacted vigorously to the latest Fed movement. But will the market believe in this rally or may it be a short-lived situation as investors are going to discover that the whole picture is not as bright as the QE3 news could suggest?
The FXstreet.com team has studied the engines of the global recovery with the help of worldwide experts. Together, we have worked on a special topic-by-topic content to prepare you for the coming months. Today's issue is about commodity currencies and economies related and is written by Valeria Bednarik. She provides the clues for the Australian, Chinese, Canadian or New Zealander economies and their currencies in a research you ought to read.
The FED opened doors for commodity currency gainsBy Valeria Bednarik, Chief Analyst for FXstreet.com
After “QE3” the most used word in forex these days is probably “slowdown”. And besides Europe, the second focus is China when it comes to concerns over growth. When talking about commodity currencies, China is a first line read as not so long ago, Australia’s mining and resource stocks were among the worst hit sectors on fears of a slowdown in China, the biggest consumer of Australian raw materials.
China, time for changesChina’s growth is slowing but also worth’s mention is one the two of the world’s fastest growing economies along with India; discussions over a possible “hard landing” for the number two economy of the word are vast. While the slowdown is on the table for over a year ago already, Chinese GDP expanded 1.80% in the second quarter of 2012 over the previous quarter, below the average 2.7% growth of the last years. So why do we talk about slowdown, when GDP readings are not actually deceiving? A good share of GDP belongs to investment, defined as public and private gross capital formation, and if something, the country has continued to invest. That’s the main reason GDP remains fairly strong. But other signs of weakness had continued to surge over this year: China's foreign direct investment inflows fell 3.6% to $66.7 billion in the first seven months of the year versus 2011; in February, the country announced its largest trade deficit in more than two decades, based on a steep drop in exports, partly due to weaker demand from Europe, its largest trading partner. The latest trade balance showed China posted a wider-than-expected trade surplus as imports unexpectedly contracted during the month from the year-ago period, suggesting lackluster domestic demand. Exports exceeded imports by $26.7 billion during the month.
The government is also concerned as over this year, several measures that include rate and reserve ratio cuts, fiscal tweaks and loan rollovers had been taken in response to economic weakness. However, this fall will see an historical change in China: most of the top government leaders are due to be replaced, for only the fifth time since the inception of the communist China. New government will likely be willing to implement new measures and start with the right foot.
Australia, still looking to pick upIn Australia, things look a bit better: growth in employment and activity was stronger in the first quarter of 2012 than underlying fundamentals suggested it should have been. GDP expanded 0.6% in the second quarter of 2012 over previous one. The benchmark interest rate was slashed by 75 basis points to 3.5% over May and June, as the housing sector was being affected by fears of a global recession. Standard variable mortgage rates fell about 60 basis points to around 6% on the back of the central bank’s cuts. The labor market conditions have improved slightly also after the cuts, giving us a more optimistic outlook for the country. In general, the minim boom is expected to continue, despite some sectors may need to adjust to the high level of the exchange rate and raise their productivity, which can be expected to weigh on the labor market, halting the pace of recovery, but far from suggesting a fall.
Australia's period of slow economic growth is unlikely to pick up in the immediate term, but the economy will like achieve its growth potential over 2013. In the meantime, the AUD has been the preferred investment among banks that turned to the AAA rated assets of the country. Despite a knee jerk towards the 1.0160 level early this month, although managed to pick up pretty fast from the area, right below the 38.2% retracement of the latest daily bullish run. With the FED announcement on open-ended 40B monthly QE, the case for more advances in Aussie builds up, pointing for a soon retest of key 1.0610 area. Steady gains above, along with relative steady fundamental data, points for a continuation in the upcoming months towards the 1.0850 yearly high. In the case of a fall back lower, only sustained losses below 1.0160 lows will deny the possibilities of further advances, exposing 0.9660 price zone.
New Zealand, better outlookIn New Zealand, economic performance is even better, as local economy seems to be picking up at a strong pace after past year earthquake. The GDP expanded 1.10% in the first quarter of 2012 over the previous quarter, while previous year’s history was revised higher. The housing market has also gathered momentum, with market still firmly parked as a sellers market, with inventory levels across the country remaining low. New Zealand housing sector is entering its usual peak season for house sales, and seems it will continue to see good levels of activity over the upcoming three months.
The benchmark interest rate in New Zealand remains steady at its historical low of 2.50%. Inflation is balanced, and if anything, the RBNZ concerns are due to the strength of the currency, rather than worrisome over China or Australia possible slowdown, New Zealand’s top two trading partners. Recent comments from governor Bullard however, suggest the central bank is somewhat resigned to the currency strength, also gathering momentum in market demand of alternative high yielders.
The NZD/USD trades around 0.8300, having surged over 400 pips in the last few days, and confirming a mid/long term bullish outlook with 0.8470, this year high now at sight. With short term corrections in the middle, the dominant trend is bullish, and won’t be easy to see a reversal after recent economic developments across the world. Even further, the pair may attempt to continue to the historical high reached August 2011 at 0.8840, although I would expect the RBZN to begin a battle against investors if the level is reached. For this second half of 2012, 0.7900 seems a pretty fair bottom in the NZD/USD.
Canada and Loonie unbeatable strengthWhile Canadian dollar has been among the strongest currencies of the board over the last few months, Canadian economic outlook is maybe the weaker one among commodity currencies. The GDP in the country expanded 0.50% in the second quarter of 2012 over the previous quarter, fueled by business investment in plant and machinery, housing and inventory build-up. Consumer spending grew 0.2%, but was the slowest pace since the recession in the first quarter of 2009. Quite weak data that shows the country faces domestic weakness along with external risk. The interest rate benchmark stands at 1.0% since late 2010, and will likely remain unchanged until mid 2013 according to banks expectations. Governor Carney surprise market players’ monthly basis with speeches not as dovish as should be when looking at the economic situation: unemployment rate is at 7.3%, barely below the 7.6% this year high, and the economy is not expected to return to full capacity until the second half of 2013. And still the USD/CAD has reached a fresh yearly low at 0.9660 post FED, having been steadily bearish since June 2012, when it reached 1.0444. Where is the Loonie taking its strength from? First of all because of a hawkish central bank in a world where easing is the name of the game. Secondly, because of yields: as despite rates remain “exceptionally low” though the foreseeable future in both countries, Canadian interest rates and yields are still noticeably above those in the United States. Finally, oil: Canada is among the 10th major oil producers of the world, and the black gold maintains an overall strength, trading near $ 100 a barrel after a short lived slide to $ 77 past June.
The USD/CAD trades at levels not seen since July 2011, and despite current trend has barely seen intermediate corrections, there are no technical signs of a bottom or a reversal at sight. Risk of reversal however, increases on approaches to the 0.9400 area, next big target in the daily chart. But the scenario right now, favors a bearish continuation that may see the pair approaching 0.90/0.91 in the upcoming months. To the upside, immediate barrier is located at 0.9860/80 price zone, and unless a strong fundamental change in the country, sellers will likely jump in back on approaches to the level. If above, next selling level comes at parity that is now seen as a roof for the upcoming quarter.