Economic Insights
Fiscal cliff and Greek concern are still main headwinds for upside
Risk appetite improved last week on Chinese economic data strengthening further and optimism on the final compromise of fiscal cliff in upcoming weeks or months. However, worries still exist everywhere since the broad environment is still fragile.
Later in the day, the final decision should come from the Eurogroup meeting over Greece’s next bailout tranche. If it won’t surprise us, Greece should be granted the amount to fill in the current gap. The existing conflict is between Germany and International Monetary Fund (IMF); although there is very high chance that the IMF will agree to compromise in the end, its unwillingness could harm future initiative to save the nation or even the entire currency bloc. That is the concern and worry in the current stage.
Below is the Greece total outstanding debts distribution:
Source: BloombergClick the image to enlargeFiscal cliff, the so-called political problem instead of economic issue, is still considered the main “risk off” mover. Although most people on the street agree that some deals will be made in the upcoming few weeks or months. However, most investors are unwilling to increase their long ‘risk” largely into their investment portfolios.
A near term focus is addressing the Bush tax cuts: taking it as a foregone conclusion that the payroll tax cut will be eliminated to the sharp detriment of Q1 disposable income, lowering spending cap limits established in last year’s Budget Control Act and changing cost-of-living calculations in social security benefits. Retail Sales were negatively affected last month, and it is still unclear whether it was due to Hurricane Sandy or fiscal cliff.
Source: BloombergClick the image to enlargeHSBC Flash Manufacturing Purchasing Managers’ Index (PMI) continues supporting “positive momentum” view on China
HSBC flash manufacturing PMI surged to 50.4, showing potential that its final print might stay above 50 for the first time since the beginning of the year. The October manufacturing PMI from HSBC and Markit was 49.5.
The figure released earlier today, together with previous releases, proved firm bottom signs and a possible sustainable pick-up by reducing further monetary policy easing in the near future, since there still is momentum.
The People’s Bank of China (PBOC) used reverse repo instead of reserve requirement cuts as primary methods of injecting liquidity into China’s financial system. The main reason for this could be to avoid appearing too dovish, which could urge investors to move back into China’s property sector and further exacerbate the bubble in property prices. It could also be a message that it could liberalize the rate in the future.
Last week, “China related assets” such as HSCEI and the Aussie firmed their uptrend.
Source: BloombergClick the image to enlargeCurrency Insights
AUDUSD – Take the opportunity on “Fiscal Cliff”
The Aussie definitely holds strong fundmentals recently with firmer Chinese economic outlook and improving global sentiment. “Fiscal cliff” drives the risk off, but due to its bias as a political issue instead of economic, the effect could be limited and stay in a short run. This offers some long Aussie opportunity at a lower price.
In the AUDUSD H1 chart, the coming support is at 1.0400 and the next resistance is at 1.0480.
Click the image to enlarge
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