Mixed Chinese data is bad Chinese data

Asian trade has gone strongly risk off today.

Source: Bloomberg

Markets and currencies started to weaken from the open as nervousness about the Chinese trade data was heavy in the air. Chinese exports were better-than-expected and imports were slightly worse, but both continued to decline in year-on-year terms. It was basically a fairly mixed report, but with last week’s impressive rally starting to look stretched, mixed Chinese data was taken as bad Chinese data.

The ASX has struggled to hold on above the 5200 level today, capitulating back into the 5100 level. Both the ASX and the Nikkei rallied briefly as Chinese exports data came in better-than-expected, but soon continued to selloff with the overall data release painting a fairly mixed picture. The Hang Seng and the Shanghai Composite both opened down, despite a strong showing by China ETFs in US trade. A lot of Chinese data is expected this week and is clearly creating nervousness in Asian equity markets. Markets looked primed for China to disappoint them, which does not bode well for the inflation and money supply numbers expected this week.

The broader negative outlook for commodities seems to be reasserting itself in markets after last week’s rally. WTI oil declined 5.4% overnight, while Dalian Iron Ore futures dropped 4.3%. Commodity and China-focussed Asian currencies also came off strongly in Asian trade. The Indonesian Rupiah (IDR) and Malaysian Ringgit (MYR) both sold off sharply ahead of China’s trade data.

The Aussie dollar was coming off quickly ahead of the Chinese data. Speeches by voting Fed members Lockhart and Evans last night were keen to emphasise that the October meeting was live. While the Fed will not hike rates in October, a December hike is still feasible and Yellen in particular has emphasised her concerns about overheating the US economy if there is no hike in 2015.

The sharpness of the rally in the Aussie dollar last week did not bode well for its sustainability. For the rally to continue, the Aussie would need to consolidate around the 0.7350 level. Instead, the Aussie has started to selloff sharply. If one looks at the daily Relative Strength Index (RSI) for the Aussie, 9 October was only the second time this year that the RSI touched the 70 level.

When the RSI rallied up to 68 (almost at 70) in mid-May, it was the last gasp before the Aussie steadily declined below $0.70. If the Aussie does begin to reverse from here, it is quite likely to continue to decline until it meets resistance around the $0.72 level or the 50-day moving average, both of which previously served as resistance.

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