FX Market Summary 03-10-2014: China Fears Surface Again

Over the weekend, the latest Chinese trade data was sharply weaker than expected with a February deficit of US$23bn following a US$31.9bn January surplus, the first deficit for 11 months. Annual exports fell over 18% while imports posted gains of around 10%. Data is always volatile surrounding the lunar new-year period, but underlying trends were weaker and there was a deterioration in risk appetite given fresh concerns over weaker Chinese growth. There was also a sharp decline in the benchmark Shanghai equities index of close to 3% on Monday which reinforced the more defensive tone.

Commodity currencies remained in the doldrums with AUD/USD dipping to lows just below 0.9025 as copper prices took another hit and precious metals remained under pressure while USD/CAD looked to hold above 1.11 following Friday’s surge higher.

The Japanese current account data remained very weak with a record headline deficit for January at JPY1.59trn while there was a small downward adjustment to the fourth-quarter GDP figure which maintained unease surrounding Japanese fundamentals. The contrast between weak domestic fundamentals and fragile risk conditions triggered effective stalemate with USD/JPY finding support just below 103.0.

The latest CFTC speculative positioning data recorded a further small net decline in long dollar positions to the lowest level since early November which will lessen the potential for aggressive selling, especially with a further increase in Euro longs. Narrow ranges initially dominated on Monday with the Euro just below the 1.39 level as the traditional post-payrolls torpor set in.

The Euro-zone economic data had little impact with a stronger than expected increase in Italian output helping to offset a disappointing French release while the Sentix investor confidence index edged higher to the highest level for close to 3 years.

The Euro still found solid buying support on dips with declines quickly attracting fresh buying support given the uncompromising ECB stance and it settled just above 1.3850 during the early New York session.

Sterling was the main mover during the European session on Monday. There was disappointment over the failure to sustain a very brief break above important medium-term technical levels above 1.6750 which triggered some profit taking on speculative longs. There was also notable demand for EUR/GBP which moved to a fresh one-month high above 0.8330. GBP/USD initially stumbled lower after losing 1.6700 support with stops triggered below 1.6650 and a move to below 1.6630 before finding some respite.

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