Q1 Chinese GDP came in weaker than expected, as growth rate eased to 7.7% y/y, weaker than consensus estimate of 8.0% and lower than previous quarter of 7.9%. The biggest let down was due to industrial production figures which only gained 8.9% y/y as opposed to a forecast of 10%. Rate of investment of new assets for corporations have also fell slightly, coming in at 20.9%, slightly lower than the 21.3% forecast. This isn’t a huge surprise if we were to use last week’s Trade Balance data as a leading indicator. Exports growth has slowed down from 21.8% in Feb to a mere 10.0% in Mar (Y/Y), in line with a slower growth rate evident via Manufacturing PMI. It is apparent that Chinese manufacturing sector is not growing strong, and the lower than expected GDP is simply the culmination of what all the other economic indicators are showing us.
With outlook of China looking weaker, it is no surprise as well to find AUD/USD trading lower. Prices dropped from above 1.048 to a low just above 1.042 immediately after the weaker GDP data was published. Price did recover slightly but a bottom has not been formed, with current candle still facing lower, similar to Stochastic readings which is continuously pointing lower despite entering the Oversold region. It is important to note that price has been heading lower even before the negative news. 1.05 was already breached prior to the announcement, which underlines the overall bearishness seen on the short-term hourly chart. The negative GDP news only served to be the vehicle and excuse for bears to continue selling, breaking the 1.048 support.
Daily Chart shows a longer-term downtrend, with lower highs and lower lows. If one adopts this outlook, then current sell-off from last week’s high can be interpreted as a push to eventual 1.015 and potentially below, extending current overall bear trend. However, one could also view long-term trend as sideways, as the differences between peaks and troughs are minimal compared to the trading ranges between each peak and trough. If one were to adopt this view, then the bearish outlook will be less obvious, as recent highs has yet to convincingly test 1.06, the previous swing high. Current rising trendline (reliability suspicious due to only 2 touch points) may provide further support for to overall push to retry 1.06, though a true bullish outlook may require price to break above 1.05 for a test of 1.06 to start looking conceivable.
Bearish outlook will require price o break the rising trendline, though preferably, a break below 1.035 may provide more confidence that a bear trend is underway. Stochastic readings lean towards a bearish outlook with readings appearing to peak just after price entered into the Overbought region. However, reliability of Stochastic readings is also suspect due to the divergence between recent lower peak heights vs the higher highs posted recently.
Fundamentally, a weaker AUD/USD is not difficult to foresee with declining Chinese growth. Beyond the fundamentals of slower exports into China, RBA may also be forced to start cutting rates as the outlook of a stable and sustainable Chinese growth would be untenable, resulting in them potentially shifting to a more dovish tone and perhaps eventually carry out their promised rates cuts under the “if necessary” scenario.
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