audjpy risk appetite is fading fast 2252102015

More soft data economic data out of the world’s second largest economy has further poisoned investor sentiment. This has put most risk assets on the back foot in Asia and could exasperate a global risk sell-off, as well as push out any expectations for tighter monetary policy in the US this year. A desolate global marketplace, underpinned by a faster than expected slowdown of China’s massive economy and turmoil in emerging markets, is at the forefront of investor and policy makers’ attention.

Caixin’s flash reading of Manufacturing PMI for September dropped to 47.0, its lowest level in 6.5 years. This confirms fears about the deteriorating health of small-medium manufacturers in China and raises concerns about the over health of the economy and Beijing’s ability to manage the economic slowdown. Policy makers in China have already unleased a wave of easing measures designed to spur more economic activity and calm investor sentiment, and the market is concerned that Beijing may have failed on both fronts.

However, it’s too soon to write-off the government’s easing measures and it has a lot of ammunition left to fight this economic slowdown (there’s further easing in the pipeline, including on the fiscal side of the equation, but further clarification is needed). Nonetheless, this isn’t stopping the market from going into panic mode, as investors shed risk assets across the board. The market has been spooked by fears about the health of China’s economy – major banks and other institutions have paired expectations for Chinese growth this year on the back of soft economic data recently – and it’s still scared.

Market reaction

AUDUSD was immediately pushed below 0.7050 on the back of today’s disappointing economic numbers out of China (the market was expecting a slight improvement in Caixin’s Index to 47.5 from 47.3). Also, the ASX 200 was mauled by bears and is testing support around 5,000 at the time of writing. In fact, today’s data sent markets throughout Asia into a tailspin.

AUDUSD and AUDJPY

Perhaps the only thing saving AUDUSD from breaking through 0.7000 at the moment is the idea that today’s data will encourage the Fed to delay raising interest rates until next year. The US dollar is actually falling against less risky currencies, especially alongside the safe haven yen.

The damage to the aussie today is evident in AUDJPY, with the pair down around 100 pips at the lowest point of today’s sell-off. It has since regained some lost ground, but the damage has been done and the ultimate risk proxy is looking vulnerable. It’ll be interesting to see if price can break through 84.00 in the near-term; in which case the path looks fairly clear towards 82.00.

Source: City Index