It's been a phenomenal day today with the Chinese stock market rapidly altering the expectations of the market in the new year. After today's drop of 7% which saw the Chinese stock market apply circuit breaker protection in an effort to halt the bleeding, we have seen markets in a state of panic. It will be interesting to see if there is a further drop tomorrow, or if the market will claw back some of the recent drops. If there are further drops then expect the Chinese government to come out with a show of strength to help prop up the market, but for the most part the Chinese market opening will be watched with acute interest. This large selling was lead mostly in part by weak manufacturing data which showed that China is indeed contracting, as the HSBC manufacturing index m/m came in at 48.2 (49.0 exp), and many are now seriously worried about the possibility of a slowdown in Asia which could carry on into the US and European markets.
For the commodity currencies this caused large movements and nowhere was it felt more than in the AUD which saw strong selling on the back of the Chinese weakness. The dip in the AUDUSD came in on the back of the release of the commodity index for Australia which showed a dip of -23.3% for the year ending. This is no surprise given the recent weakness in commodity markets, and one of the main factors as to why the Australian economy has been suffering so heavily. With the heat now back on the Australian economy, traders will be looking to the Reserve Bank of Australia (RBA) to act in the face of global threats such as a china slowdown, and I will be looking for further signals from monetary policy statements from the RBA to see if they change their neutral tone to a more dovish one.
On the chart its quick to see the damage done by China, but for the most part the bullish nature of the AUD against the USD has been questioned previously, the news out of China just opened the floodgates to the bears. When it comes to support levels on the way down 0.7105 and 0.7022 are likely to be major targets for traders. It will be interesting to see how the market treats 0.7105 as it has held up to pressure previously quite nicely.
In addition the AUD the NZD has also taken a fair bit of heat and has dropped from strong resistance at 0.6861. This level had held up nicely as the NZD got near the psychological level of 0.7000 and it has since shown that the market still has a bearish mindset despite the recent bullish run we had. The drop today has so far held up on support at 0.6744, but it's unlikely to hold up in the long term unless we see a positive dairy auction tonight. Support further down can be found at 0.6637, however, the 50 day moving average may act as dynamic support as well so traders will be watching this closely.
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