Risk currencies grind higher despite persistent global growth concerns

Sentiment barometers continued to show restraint overnight with global growth concerns remaining a key catalyst. Concerns China may be enduring a new phase of weakness and persistent euro-centric anxiety, have kept sentiment contained with yesterday’s Inflation data from China promoting growth concerns ahead of critical data this week. Chinese Inflation slowed to a yearly pace of 2.2 percent in June from a previous 3.0 percent, representing the slowest rate of inflation since January 2010. Producer prices fell 2.1 percent on year – both releases were in line with economists’ consensus estimates. Although the latest inflation data suggests further policy easing measures are on the horizon, the dramatic fall in consumer prices has been viewed as a negative precursor ahead of other key releases this week. While China has in the past made no secret about their intention to tame inflation and engineer more sustainable levels of growth, fears the economy is succumbing to the downside pressure driven by persistent anxiety from the Euro area continues to take its toll. Economic data out of Japan yesterday also emphasized weakening global demand showing a significant fall in the current account surplus, while machine orders dropped near 15 percent in May.

European equities extended losses overnight as peripheral bond yields continued to rise, suggesting little faith in EU leader’s ability to contain the crisis. Spanish debt remained out of favor with the benchmark 10-year yield rising back above the 7 percent region considered the ‘bailout zone. ’ Meanwhile, European Council members have resumed talks in Brussels in an effort to iron out the finer points of Spain’s banking bailout. After pledging up to EUR100 billion in rescue funds, members must now reach a consensus on the conditions of the loan with a “memorandum of understanding” required to be agreed to in exchange for financial assistance.

Despite this general lack of enthusiasm; risk currencies were able to grind higher after solid losses in early European trade. Residual support from higher crude prices have – in part – promoted U.S dollar weakness which has assisted the Aussie dollar to key of intra-day lows of 101.54. After touching fresh 2-year lows, the EURUSD followed a similar path but still unable to break out of it current range between $US1.2253 and 1.2325.

The health of the world’s second largest economy will continue to govern market moves today with Chinese Trade Balance data on the docket at midday. Given recent PBoC policy easing initiatives, there will be a particular focus on changes to import data to gauge if there is any improvement in domestic demand. Also on the bill today is the NAB business conditions index due for release at 11.30am.

The risk selloff last week reversed after the strong Chinese GDP. We look at AUD pairs for potential trades next week. The patterns of most AUD pairs remain bearish forcing us to believe that the selloff in risk may continue next week. We specifically look at the following pairs,

AUD/USD (Figure 1): This pair has broken below the rising trend line that had guided the pair higher from the 0.9580 level. The pair is currently retesting the broken trend line which should now act as resistance. We will be looking to short this pair on failure of this retest with stops above the 1.0282 level and targets of 1.0150 and 1.0050.

AUD/NZD (Figure 2): This pair has been consolidating in a triangle pattern on the weekly charts. The pair is approaching the top of the declining channel around the 1.2950 region. We will be looking to sell a test and failure of the pair around that indicated level. Stops for the trade can initially be placed above the 1.3050 level with targets close to the 1.2750 and 1.2550.

GBP/AUD (Figure 3): This pair is testing its declining trend line and horizontal resistance in the 1.5250-1.530 region. A failure at these levels should push the pair back to the 1.50 region. A break above the resistance zone on the other hand should push the pair higher towards 1.55. Our bias remains bearish risk and we will be looking for a break above the specified resistance zone.
We will update you about any positions taken.
Good luck trading.