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By Gaurav Kashyap, Head of DGCX Desk at Alpari ME DMCC
Q1 growth in China slowed to 8.1%, its weakest expansion in three years. Markets had been expected a growth rate of around 8.4%, following a previous reading of 8.9%. The slowdown has been in large part to waning demand from the West for Chinese products. Although recent trade data showed an improving Chinese trade balance, the drop in YoY Exports to 8.9% (previously 18.4%) was more alarming as it reinforced the drop in demand from the US and Europe - both of whom are struggling with sluggish consumer spending amidst a fragile jobs market, and the liquidity crunch which has kept European demand at bay.
To add to the woes of the policy makers in China, data from earlier in the week showed that despite slowing growth, price pressures in China have increased. The inflation reading on Monday showed prices increased to 3.6%, above market expectations of 3.4% and well above the previous reading of 3.2% - and this potentially sets up a sticky situation for the PBoC. Their recent actions to curb price growth seem to have worked (in July of last year, the rate of inflation peaked at 6.5%) and current rates remain below the target 4%; however growth has tapered off amidst these measures as the most recent data suggests.
Australian dollar posts gains
The Australian Dollar was in focus this week amidst the slew of Chinese numbers. AUDUSD managed to record its first weekly gain after three weeks of losses, which has seen the pair slide from 1.06 levels to 1.03 levels. It was a tale of two halves this week for the AUDUSD - the pair slipped more than 100 points after two events saw the risk off trade dominate in the early parts of the week.
First, Chinese data hinted that the PBoC could afford to relax with additional easing measures (inflation data increased and the trade balance surprised to the upside). And second, widening bond yields in the European periphery saw the European sovereign debt crisis dragged back to centre stage which severely cramped risk sentiment. However, as those yields crawled back and risk appetite improved, the Aussie rallied from those intraweek lows to gain close to 200 points.
Improving data from down under eased some of the concerns that the RBA would be cutting rates - data showed that 44K new jobs were added in March, trumping expectations of 6.5K, and well above the previous reading which showed -15.4K jobs were lost. The overall unemployment rate dropped to 5.2% from 5.3%. Going forward, further downsides are favored for the pair.
Developments out of Europe (we will continue to watch the yields on Spanish & Italian 10-years) and actions from the RBA will weigh heavily on the Australian Dollar in the week ahead. The RBA will be releasing the Board minutes from April and focus will be on the tone and rhetoric with regards to the upcoming rate cuts. Technically, the pair faces initial resistance in the channel between 1.0500-1.0550 levels which would provide a short opportunity followed by 1.0630 levels.
Spain puts Euro crisis back centre stage
The other big story of the week was the re-emergence of the European sovereign debt crisis with yields on the Spanish 10 year hitting a five month high of 6.016%. The higher yields at 6% once again sparked fears that another bailout was on the horizon, this time for Spain, who many see as the next most vulnerable of European sovereigns.
Spain has been burdened by civil unrest on the back of austerity measures from its government.
Staff
