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AUD/USD: expected to be supported by further stimulus from China

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AUD/USD: expected to be supported by further stimulus from China


Abstract: China’s GDP in the second quarter increased by 0.4% year-on-year, which was less than expected; AUD/USD was not volatile, and bulls were concerned about the upper wedge resistance.

During the day, China reported a 0.4% year-on-year growth in gross domestic product (GDP) in the second quarter, missing expectations for a 1.0% increase. The slowdown was due to Covid restrictions from March to May. The real estate industry is another headwind for China’s economy. According to Chinese media, owners of unfinished buildings in many places “collectively” stopped lending.

A slowdown in the world’s second-largest economy could lead to a downward revision of global growth forecasts. The International Monetary Fund’s World Economic Outlook will be updated on July 26. In its April update, China’s growth rate for 2022 was forecast at 4.4%, which is well short of the 5.5% target China is pursuing. Copper and iron ore prices have fallen more than 20% since May.

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China may need to turn on the stimulus tap to support growth. Local governments are under pressure to issue more special bonds for infrastructure projects, a move that could send metals prices lower. Chinese policymakers appear focused on increasing the supply of credit rather than lowering interest rates. This morning, the one-year MLF rate was unchanged at 2.85%.

China’s June data showed signs of recovery. Industrial production rose to an annualized rate of 3.9% in June, up from 0.7% in May. Retail sales climbed 3.1% y/y in June, beating the -6.7% y/y rate and beating the 0.3% consensus estimate. A rebound in the economy in the third quarter is a likely scenario if China takes a more accommodative and targeted approach to contain the covid-19 outbreak and stimulus measures increase. This may explain the AUD’s upward reaction.

AUD/USD daily chart

AUD/USD gained about a quarter in overnight volatility. Prices are nearing wedge resistance, which overlaps the trendline of the December 2021 swing high. If resistance is broken, the 20-day simple moving average will be in focus.

(Thomas Westwater)

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