Market update: lackluster Chinese growth complicates the Aussie dollar outlook

[MongiIG]

Weak Chinese economic growth meets Conservative yearly target, SSE composite index faces deep sell-off with limited reversal prospects. Meanwhile, high 'beta' Australian dollar vulnerable amid global index decline.

 

Source: Bloomberg

 

Forex Indices China /business/market_index Economy of China Dollar

 Written by: Richard Snow | Analyst, DailyFX, Johannesburg | Publication date: Thursday 18 January 2024 05:01

China’s economy grew by a modest 1% quarter-on-quarter (QoQ) in the three-month period between October and December, and rose 5.2% when compared to Q4 of last year, to end 2023 having achieved growth of 5.2% - meeting the conservative target set by Chinese officials. A similar target is anticipated for 2024 as challenges around deflation, weak demand and an ailing property sector continue to weigh on the world’s second largest economy.

 

Source: DailyFX

The prospect of further policy easing becomes more and more likely but any changes to the interest rate could see the yuan depreciate even further than what we have seen playing out in January thus far.

SSE composite index sell-off surpasses prior low with little chance of reversing fortunes

The Chinese index sold off on Wednesday amid the disappointing growth data, likely charting a new path to the downside. Looking at the weekly chart, price action fell beyond the major low of April 2022, with the March 2020 low next insight. The Chinese economy has been plagued by the deteriorating property sector, worsening aggregate demand and deflation.
it is now widely believed that Chinese officials will have to come to the rescue and provide sufficient stimulus to support the Chinese economy in 2024.

However, cutting interest rates will leave the local currency vulnerable after already depreciating against the dollar since the turn of the new year. Policy setters may also consider adjusting banks’ reserve ratio requirements but ultimately the market appears dissatisfied with existing stimulatory efforts.

SSE composite index weekly chart

 

Source: TradingView

High ‘beta’ Australian dollar appears vulnerable amidst a general decline in global indices

The Australian dollar, not too long ago, was propped up by two factors, which have subsequently reversed. The first was the increasing expectation around Fed rate cuts in 2024, and the second was the lingering threat of rising Australian inflation at a time when other countries had already seen massive improvement on this front.

Fast forward to today and stubborn inflation in the EU, US and UK, particularly in December, has caused a general repricing in bond markets as expectations around the timing of interest rate cuts have been pared back. With rate cut expectations easing, the US dollar has picked up a bid in recent trading sessions forcing AUD/USD to break beneath the ascending trend line - which has been acting as support - as well as the 0.6580 level.

There can be little doubt that today's Chinese growth data played a part in the continued selling, which has now breached the 200-day simple moving average, on the cusp of oversold territory. The challenge here is to assess whether the majority of this move has already played out; and given the fact that we are nearing oversold territory, it may be more prudent to monitor a potential pullback from such overheated levels before considering bearish continuation plays.

Nevertheless, the ‘high beta’, procyclical Australian dollar reveals further vulnerability by virtue of its relationship with the S&P 500 - as it tends to rise and fall in a similar fashion. Major equity indices have turned lower recently while the S&P 500 holds up well. Keep in mind rising geopolitical uncertainty, a stronger dollar and a recent rise in US yields does pose somewhat of a headwind for the index ahead of the mega-cap US earnings which is set to get underway next week.

AUD/USD daily chart

 

Source: TradingView

 

 

 

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.