AUD/USD awaits Chinese data.
AUD/USD downside opening up?

AUD/USD slipped a few pips further in early Asia, extending the downside from 0.7593 highs. Currently, AUD/USD is trading at 0.7562, down -0.04% on the day, having posted a daily high at 0.7571 and low at 0.7551.

The USD picked up some interest heading into and after the NY close which is hurting the antipodeans ahead of key Chinese data today. Caixin China Manufacturing PMI is due today along with the local Housing data. We already had the AiG Performance of Mfg Index (Nov) arriving at 57.3 vs  51.1 prior.

Recent domestic data for AUD

As a recap, however,  Q3 capex came in as expected at 1% and the figure that feeds into GDP. The estimates point to non-mining sectors driving capex activity going ahead, the data reinforcing the RBA’s message. Then, the number of Building Approvals for Oct rose 0.9%/m, better than the mkt f/c for a 1% drop and private sector credit rose +0.4%/mth in Oct, led by a +0.5%/mth growth in housing (owner-occupied +0.6%, investor loans +0.2%). However, the data has not been regarded as a game changer for the RBA, expected to keep its cash rate at 1.5% next week, (Dec 5).

AUD/USD levels

Valeria Bednarik, chief analyst at FXStreet explained that, technically, the pair retains its bearish tone, as in the 4 hours chart, the price is retreating from a bearish 20 SMA, while technical indicators turned south within negative territory, after failing to overcome their mid-lines. “Below the 0.7530 region, the downward momentum will likely accelerate, with the pair then targeting 0.7450,” Valeria added.

Meanwhile, Jim Langlands at FX Charts argues that another choppy session could be in store although he lean towards selling into rallies, looking for an eventual test of 0.7500, and lower, as we approach the next Fed meeting on Dec 13, (Sell AudUsd @ 0.7585. SL @ 0.7615, TP @ 0.7500).

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Analysts at Westpac noted the key insights, in respect to AUD/USD, from this past week.

Key Quotes:

“Ahead of next week’s GDP report, the CAPEX survey for the September quarter was the focus in Australia. In the US, the market waited for an initial Senate vote on tax reform and looked forward to the December FOMC meeting, due in a fortnight’s time.

Beginning with the CAPEX survey, spending in the quarter was modestly ahead of our expectation, rising 1.0%. However, for the GDP forecast, the important point was that the equipment sub-component was in line with our expectation at 0.7%. Our forecast for Q3 GDP therefore remains unchanged at 0.8%, 3.1%yr.

Key trends from the September quarter CAPEX survey include: a greatly diminished drag from mining investment as well as improved momentum in manufacturing and services; by investment type, construction spending is in a robust uptrend and is set for further gains, but the equipment trend continues to underwhelm- chiefly because of the weak state of the consumer.

On expectations for the 2017/18 financial year, there has been a material improvement in the willingness of firms to invest. Estimate 2 six months ago pointed to a 6% decline in spending; however, that was marked up to -4% three months ago in estimate 3, and now to +2% in estimate 4. This is the first time in five years that estimate 4 has been positive. Upgraded investment intentions were seen across all three sectors (mining; manufacturing and services), though manufacturing saw the largest improvement. Despite this positive momentum, growth in business investment in calendar 2017 is still only expected to be around 5%. Further, for 2018, risks to the view are to the downside, particularly given the underwhelming trend for equipment investment.

Turning to dwelling approvals, the October outcome beat expectations as Victorian approvals spiked. Most of the gain in Victoria was due to surging high-rise approvals, but non high-rise approvals also reached a new high. We don’t believe this renewed strength in Victoria will be sustained. (Note that high-rise approvals in NSW and WA both fell back in October after spiking in September.) We remain of the view that residential investment has passed its peak and will be a meaningful detractor from growth in 2017 and (all the more so) in 2018.

Supporting our downbeat view on housing are a continued deceleration in price growth (CoreLogic home prices falling 0.1% in November after a flat October; see forthcoming bulletin for all the details) as well as the ongoing loss of momentum in housing credit growth, as investors pull back. For a full run-down of all the salient features of the Australian housing market state by state, see the latest Westpac Housing Pulse.

In China, the official PMIs surprised to the upside in November, partly retracing October’s pull back. Month to month volatility aside, the manufacturing PMI is in line with its long-run average despite the recent introduction of more stringent environmental protections. The service PMI is also near its long-run average, indicating continued robust growth in this sector too. Activity in the manufacturing sector will soften in 2018 as the current downtrend in investment weighs. Further, the weakness that has been seen in employment in both of the PMI surveys this year is likely to restrict growth in consumer spending. We remain comfortable with our view that GDP growth will slow from 6.8% in 2017 to 6.2% in 2018.

Finally, turning to the US, the data pulse has remained positive and the market expectant of an initial ‘yes’ vote on tax reform in the Senate. That has helped US equities reach new record highs, though the US dollar has in contrast been comparatively downbeat – particularly against the Euro and Yen. Soon to be FOMC Chair Powell appeared before the Senate Banking Committee as part of the confirmation process. As expected, he kept to the FOMC’s current script, signalling that the status quo will be maintained.

In contrast, Chair Yellen spoke a little more freely in her last appearance before the Joint Economic Committee of Congress. Particularly notable were her comments on productivity growth (“dismally slow”); the need to seek greater income equality; and the limited real economy benefit likely from the current tax reform package before Congress. What this all boils down to is that US economic growth will continue to rely on loose financial conditions and limited household income growth. Because of this reality, we remain of the view that this rate hike cycle will top out at 1.875% in December 2018.

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