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Markets continued to edge higher in the US on Friday and brushed off some negative tape out of Europe. Although the gains in the US were only minor, the Dow and S&P still managed to finish the session at record closing highs. Fed member James Bullard was on the wires with some dovish comments opposing dialling down stimulus due to the threat of disinflation. He would like to see inflation tick higher towards 2%. However, over in Europe France was downgraded to AA+ outlook stable (from AAA) by Fitch, merely bringing its rating in line with Moody’s and S&P. Portugal also remained in focus as the political situation remained tense and yields pushed higher.
AUD/USD dropped significantly and even ventured a touch below $0.90 in European trade. The pair printed a low of 0.899 before managing to bounce back to around $0.908 and will be back in focus today ahead of China data. Meanwhile, EUR/USD managed to find support at $1.30 but remains contained by the $1.31 level. We feel the single currency might be a source of volatility for markets this week once the novelty of the recently dovish Fed comments wears off. USD/JPY is just holding onto ¥99 with Japan closed today for the Marine Day holiday.
A data dump from China will be the main point of focus for risk today with a raft of releases set to hit the wires at midday. China’s Q2 GDP is expected to cool to 7.5% which would see the annual run rate steady at 7.7%. For the quarter, real GDP is expected to rise 1.8% (from 1.6%). With China admitting to trade figures manipulation recently, and the government content with liquidity tightening, many analysts expect further deceleration in growth over the second half. China will also release industrial production, retail sales and fixed asset investment. Any big misses on these prints could see AUD/USD trade below 0.90 again today. We continue to feel selling into strength is the preferred strategy on AUD/USD but momentum plays on a break below $0.90 can’t be ruled out.
Ahead of the open we are calling the Aussie market up 0.3% at 4990. On Friday we briefly traded above but failed to close above key resistance at 5012. This is the 61.8% retracement of the recent sell-off from 5246 to 4632. A closing break here would be very positive but we remain concerned about the reversal from the highs at that level on Friday.
We expect to see the resources get off to a fairly positive start with BHP’s ADR pointing to a 0.3% rise at the open to 33.41. Iron ore was up 1.3% to 126.8 and this should be quite supportive today. Other cyclicals are also likely to get off to a good start as risk continue to benefit from the recovery in US equities. The key releases out of China are likely to keep markets relatively sidelined heading to the data. Billabong could continue its recent recovery on the back of reports it is seeing strong sales in the US, Canada and South America.