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FXPRIMUS Market Brief of the Week: How Low Can Aussie Go?

SINGAPORE, SINGAPORE -- (Marketwired) -- 01/29/14 -- In FXPRIMUS' Market Brief of The Week for 27 January, the brokerage firm's Senior Economist, Jimmy Zhu, discusses how the Chinese economy and next Federal Open Market Committee meeting may influence the market.

Economic Insights

Weak Chinese Economy and Coming Federal Open Market Committee (FOMC) Meeting Could Threaten the Value of Aussie Dollar Again

Aussie traded below 0.87 last Friday afternoon against the Greenback, after the rising credit risk appeared in shadow banking. More regulations may arrive as Chinese government may carry its best effort to avoid default. We have been hearing some relative regulation aiming at the shadow banking sector, but none of these were officially confirmed by the China Banking Regulatory Commission (CBRC). However we believe the recent WPM's case under mining was in CBRC's radar.

Conflicts are everywhere on how to deal with shadow banking in China. We put aside whether the government has enough power to crack down those activities even though we know there are many challenges. If the size of shadow banking decelerated, where is the growth coming from? The recovery of the western economies at this stage is still not strong enough to lift Chinese overseas shipping activities, based on the past six months reading of Chinese exports growth. We have to admit that most of the recovery in western economies is due to the monetary stimulus, benefiting the financial market more than main streets. In other words, demand remains soft. If exports can't help much, the Chinese economy will not grow to a satisfactory level in 2014 given much less local consumption.

China's potential shadow banking concerns not only drags the Aussie dollar, but negatively affects global sentiment as well. Weak manufacturing data in China could reflect subdued global demand. Last Friday, U.S. equities heavily sold off ahead of the key FOMC meeting this week. Dow index was down more than 300 points, booking the worst week since 2012 by losing 579 points, or 3.5%. Lack of fresh catalysts is the main reason triggering price pullbacks, instead of a crisis. Investors are paying full attention to how the Federal Reserve (Fed) elaborates the December payroll data, and whether they would postpone the "January tapering" until economic data returns to expectations.

Here are our expectations on how the market could react according to the FOMC meeting's decision under a few scenarios,

1.  If Fed continues to taper USD 10 billion, we could see equities rebound
    from the recent selling off, and Greenback would gain momentum as well.
2.  If Fed decides to "hold on" first, market could continue to sell off
    U.S. equities in near term, and Greenback shall tumble as well.

Trade Recommendation

USDJPY - Long When Price Rebounds to 101.90

Recent USDJPY rallied mainly reflected traders' mood to seek safe haven currencies such as "JPY" and "CHF", as both of these two rallied against most of the G10 currencies. We seldom experienced this kind of scenario last year due to sound global economic recovery.

However we remain our view that the recent USDJPY slump may offer investors an opportunity to buy the bottom pair, mainly due to,

1.  Seeking safe havens last week due to no fresh catalysts, instead of a
    crisis.
2.  Fed is likely to continue to taper next week, which is positive for the
    Greenback. (If they don't, we may consider adjusting our strategy.)
3.  Bank of Japan may act as early as April to counter domestic tax
    increment.

Based on the H4 chart, the level of 101.90 could be the next support for USDJPY. We would go long if its price reaches this level.

Entry Price - 101.90
Stop Loss - 101.40
1st Target Price - 102.40
 2nd Target price - 102.90

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