China’s GDP shows Economy Might be Overheating

Last night Chinareported that its Gross Domestic Product grew 11.9 percent from a year ago.This was slightly better than the median guesses of 11.7 percent.  The news, that China’s economy accelerated more thanexpected in the first quarter, raised concerns that it may be overheating,prompting more talk of a possible interest rate like.

Last night Chinareported that its Gross Domestic Product grew 11.9 percent from a year ago.This was slightly better than the median guesses of 11.7 percent.  The news, that China’s economy accelerated more thanexpected in the first quarter, raised concerns that it may be overheating,prompting more talk of a possible interest rate like. Traders are alsoincreasing speculation that Chinamay revalue its currency as soon as next week. If this takes place, look forthe Japanese Yen to strengthen and the U.S. Dollar to weaken.

To recap Wednesday’s trading activity, the Dollar lostground across the board after Fed Chairman Ben Bernanke’s dovish testimony.Testifying before the Joint Economic Committee, Bernanke reiterated the Fed’sstance that interest rates would remain low for an “extended period”. He alsosaid “the income data suggest that growth in private final demand will besufficient to promote a moderate economic recovery in coming quarter”. Finally,he added that “significant restraints on the pace of the recovery remainincluding weakness in both residential and nonresidential construction and thepoor fiscal condition of many state and local governments.” In summary,Bernanke weakened the Dollar by stating that the recovery will continue to bemodest while indicating the Fed has no intention of changing its languageregarding interest rates in its FOMC statements.

The EUR USD is selling off sharply overnight. Marketparticipants are feeling jittery again because of concerns over Greece.Investors are worried that the IMF/EU $61 billion financial aid plan will notbe enough to help the Greek economy and restore confidence in the Euro. At thistime, the Euro is facing serious credibility issues.

High premiums demanded by investors on Greek bonds rose 400basis points above the German Bund for the first time since the rescue plan wasannounced on April 11th. This is the clearest sign that investors are becomingworried again. In addition, after three tries, the Euro has been unable to takeout the high reached Sunday night at 1.3691. Hedge funds continue to be shortand appear to be adding to their positions on each rally.

At this time, the course of the Euro remains weak. Over thenext week, several European Union nations will be meeting to approve theircontributions to the EU bailout plan. This voting process could be anothersource of turmoil for the Euro. Not only will these nations have to put up themoney to back Greece, butthey may have to begin discussions about the possibility of similar problemsspreading to Portugal.

Now that traders have had almost a week to digest the EUrescue package, a consensus is building which believes that this plan wasnothing more than a short-term fix and that long-term problems still exist.Some sources say the key to a long-term solution to the sovereign debt problemsin the EU sits firmly on Germany.Pressure is mounting on Germany to loosen up a bit and make it easier forstruggling nations to get the aid they need to survive while simultaneouslydeveloping a plan to address financial aid issues which may arise in thefuture.

The GBP USD traded higher early in the trading session aftera report showed the opposition Conservative Party’s lead over the Labor Partywidened, easing concerns that the May 6th election will produce a hungparliament. Traders had been pressuring the British Pound lately because ofconcerns that a hung parliament would result in a government too weak to tacklethe U.K.’shuge budget deficit.

Traders are also beginning to doubt the viability of thecurrent rally. Speculation is building that bullish traders will begin toliquidate their long positions ahead of the election. Technically, the chartsindicate this market may accelerate to the downside if uptrending Gann anglesupport at 1.5397 is violated today. The most likely downside target is 1.5160on April 20th.

News that China’sGDP was up slightly more than expected during the first quarter is helping topressure the USD JPY. Additional pressure is being provided by traders leavingthe higher risk U.S.equity markets. Technically, the charts indicate that downside momentum couldtake this market down to 92.26 over the near-term. Traders should also notethat the general consensus suggests that the Japanese Yen is likely to gainwhen Chinadecides to revalue its currency.

A drop in demand for higher yielding assets is helping tounderpin the USD CAD overnight. The short-term picture indicates thepossibility of a short-covering rally. Traders may also be lightening uppositions ahead of next week’s Bank of Canada meeting on April 20th.

For over a year, Bank of Canada Governor Mark Carney haspledged to keep interest rates at a record low of 0.25% through June. Canadianfinancial markets are indicating, however, that rates may rise as early as June1. This helped pressure the USD CAD below parity recently.  The bigger picture suggests the CanadianDollar is likely to continue to rise because of the stronger-than-expectedeconomic recovery and expectations for interest rate increases.

The AUD USD rose overnight following China’s strongGDP report. Weaker demand for higher yielding assets, however, quickly broughtin sellers. The recent two day rally may be setting up the market for a break.This is possible due to the closing price reversal top at .9387 which is stillweighing on the markets. A trade through .9223 will turn the main trend down.

The NZD USD is feeling similar pressure but this marketcontinues to remain glued to a major 50% price level at .7124. The chartsindicate that downside pressure is likely as long as the Kiwi remains below.7200. A break through .7086 will turn the main trend down. Traders may beginto sell off both the New Zealandand Australian Dollars ahead of next week’s possible revaluing of the Yuan by China.

 

 

 

 

 

 

 

 

 

James A. Hyerczyk has been actively involved in the futures markets since 1982. He has worked in various capacities within the futures industry from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis. His firm, J.A.H. Research and Trading publishes The Forex Pattern Price Time Report... More

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