Risk underpinned by China credit growth

The dominant theme in the FX space on Friday was further US dollar weakness on the back of some disappointing economic data, particularly industrial production.

It was a big miss in US industrial production (-0.3% versus 0.2% expected). However, this was once again attributed to weather-related issues and this is increasingly becoming a theme in US economic data. Unless we start seeing some strong bounces over the next few months, then some real concerns may emerge. AUD/USD has got off to an OK start to the week, with focus being on some data released in China over the weekend. China new loans smashed expectations over the weekend, coming in at CNY1320 billion versus CNY1075 expected. AUD/USD is currently hanging around 0.904 and might be looking to extend these gains when we get the RBA’s monetary policy meeting minutes tomorrow at 11.30am (AEDT), which are likely to reinforce the RBA’s switch to a neutral bias.

Yen strengthens on GDP data

USD/JPY has been subdued over the past couple of weeks, with USD weakness being the primary driver of the move. Today we had Japan’s GDP data due out, of which the market expected a stellar result. The market seems to have gotten ahead of itself with Japan data missing estimates by quite a margin. Annualised GDP came in at just 1% when the market was expecting 2.8%. For the quarter the market was expecting a jump to 0.7% and the reading came in flat at 0.3%. This data resulted in a strengthening of the yen, with USD/JPY dropping to a low of 101.41. We still have industrial production data due out at 15.30 AEDT out of Japan and this could result in further volatility in the yen. A retest of 101 might be on the cards if the current weakness persists. With US markets shut for a bank holiday, then most of the volatility is likely to come from the yen side.

Pound going from strength to strength

We’ve also seen a big move higher in the pound this morning which took cable to its highest level since November 2009. The move higher in the pound has been pinned on talk of a Vodafone/Verizon deal. BoE Governor Mark Carney was also on the wires last night and reiterated that any increases in borrowing costs will be limited and gradual. This has not deterred the pound though as it looks to challenge psychological resistance at 1.68. There is no major economic data out of the UK today, but tomorrow we have CPI due out. If we get a strong reading we could see the sterling extend its gains.

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