China Suffers Another Setback

Daily Analysis - 09/06/2015

Efforts to Restore Growth in Chinese Economy Falling Short


Inflationary figures released overnight show that policymakers have a long ways to go in order to restore growth in the local economy as overcapacity lingers amid the global downturn in trade. However, ambitious plans to connect to new markets across Europe, Asia, Africa, and South America are expected to open opportunities to export spare industrial capacity.

Chinese Inflation Descends

Data released from China overnight showed that the nation is continuing to experience a slowdown from both the consumer and producer angles. The consumer price index printed at -0.20% month over month, meaning deflation has set in with the annualized figure declining to 1.20% from 1.50% prior. The contraction in producer prices was even sharper with the comparable producer index printing at -4.60% year over year. As China faces a slowing economy, the country is focusing more on developing its influence abroad vis-à-vis its “One Belt, One Road” initiative. The ambitious plans to connect Europe, Asia, and Africa with a more modernized silk road encompasses investment in infrastructure, transportation links, telecommunications networks in a vast effort to find new markets for its vast overcapacity. As domestic demand seems unlikely to be boosted in the short-term, instead of investing already overbuilt infrastructure locally, the nation has set its sights on the rest of world.


Canadian Housing Rebound

The rout in oil prices extended beyond American borders, with commodity-producer Canada also a casualty of the dip in energy prices. The rapid decline in crude oil prices meant that many Canadian oil sands projects were operating at unprofitable levels, further impacting the nation’s GDP and forcing the Bank of Canada to cut rates to avert a total slowdown. Nevertheless, despite the energy sector woes, the housing sector continues to show improvement and underpin the present economic expansion. Housing starts managed to rise above the prior number of 183,000, printing at 201,700 marking the fastest pace of expansion since November of 2012. Accompanying the gains in housing starts was the upswing in build permits which rose 11.60% versus the previous month. The Canadian dollar benefited from the announcements, with the USDCAD pair retreating towards support at 1.2377.


Swiss Unemployment Holds Steady

In a boon to confidence in the conservative alpine nation, Switzerland saw unemployment in the nation hold firm at 3.30% despite a rate of unemployment that is over three times higher in the neighboring Euro Area. The country has effectively managed to build a firewall which has prevented the contagion circling through Europe from entering the economic haven. However, conflicting comments from present and former policymakers show that the potential ramifications from a Greek exit from the Euro Area remain unknown. Former SNB Chairman Philipp Hildebrand who now serves as the Chief Investment Officer for Blackrock commented yesterday that he saw “no short-term contagion on possible Grexit” before following up with the fact that he was “unclear what would happen long-term.” Meanwhile, the Swiss National Bank continues to struggle to meet its soft exchange rate target of 1.0500-1.1000 versus the Euro, with the pair currently trending near 1.0470.


Gold Equidistant Channel Technical Pattern

Gold prices have been steadily trending lower since breaking higher in the middle of May on the back of a weaker dollar. However, steady improvements in American economic data have improved the outlook for interest rate hikes, adding to momentum higher in the dollar. Coupled with the weak inflationary outlook further evidenced by the tumble overnight in Chinese figures shows that using gold as a hedge against fiat currency depreciation is unnecessary at the moment. The downward trending equidistant channel formation has a bearish bias, with ideal positions taken near the upper channel line targeting the lower channel line. Fighting the downtrend is unwise considering the worsening reward characteristics and expanded risks. However, any move above the upper channel line could signal a potential breakout targeting resistance at $1200.


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