Risk Averse Session Hits AUD and NZD as China Hikes Rates
Risk off trading has come to the forefront as this week started with risk-off news in the from of several developments. First, we had credit rating agency cast doubts on the private bond holder participation in a 2nd Greek bailout without it being labeled a selective default. We had worrying signs coming from the Chinese banking sector. We followed that up with a downgrade of Portugal by Moody’s which felled the EUR, while today we had confirmation of rumors that the Chinese central bank was going to raise interest rates, which they did today.
From Bloomberg: “China raised benchmark interest rates for the third time this year after inflation accelerated to the fastest pace since July 2008.
The one-year deposit rate rises to 3.5 percent from 3.25 percent, effective tomorrow, the People’s Bank of China said on its website today. The one-year lending rate will increase to 6.56 percent from 6.31 percent.
Today’s move may fuel concern that monetary tightening will trigger a slowdown in the world’s second-biggest economy. A manufacturing index fell in June to the lowest level in 28 months on weaker growth in orders and output.”
A combination of Euro-zone sovereign debt worries and concern about slower growth in China adds up to a move towards safe haven currencies and away from higher yielders. The EUR/USD extended its losses from yesterday, slicing last week’s rally’s gains to 50%.
The EUR/CHF also saw a strong 1% drop in today’s overnight session. But we also heard the Swiss government complaining about the strong value of the Franc, though the SNB may be quite powerless to do anything about it.
See more on EUR/USD in our Technical Update: EUR/USD Plunges after Topping Confirmation; Starts Triangle Scenario
The news regarding China would have the most impact of the AUD/USD and NZD/USD as they rely on Chinese imports of their goods to boost trade – a strong contributor to overall economic growth.
The AUD/USD slid down to the 1.0653 area, testing the 55-ema in the 4H timeframe:
After the strong rally which came amid heightened risk appetite on relief with the Greek situation, we are now pricing in risk averse events, which can cause us to further retrace last week’s rally. A move below the 55-ema, targets the 200-ema and beyond that the 50% retracement of the swing last week at 1.0590. How US equities respond to the news out of China as well as the upcoming ISM services index will be crucial to whether this pair extends its fall or finds support here.
Later today, at the start of the Thursday Asian session we want to watch for the Australian employment report, as that is our final Aussie fundamental risk event for the pair.
A break out of this range to the downside would test the 200-ema in this timeframe, and expose this pair to further declines. That would again depend on risk aversion dominating the US session. The Kiwi has been resilient of late and we would have to see further confirmation of weakness before attempting to short the pair.
Chief Market Analyst
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