Latest China data boosts euro, Aussie

China reported its version of “beat by a penny” as GDP of course came in 0.1% above expectations for the year-on-year and the latest industrial production and retail sales data for March likewise were reported stronger than expected. This saw the euro recovering again overnight after a tepid session yesterday and the Aussie jumping higher, together with select EM currencies.

The hope is that a sharp recovery in Asian demand will feed demand for imports from the EU. The Aussie was also firm on the news, though some of the strength there may be down to a sharp acceleration in AUDNZD higher on the Q4 CPI data from New Zealand overnight, which missed badly and has the market moving forward its anticipation for an RBNZ rate cut.

The “melt-up scenario” we have discussed in recent weeks remains more or less fully engaged, as equity markets registered another local high, taking us to less than a percent below the all-time highs before the October. As we have also argued, in a world with vastly larger amounts of debt as percent of GDP, the head-room for a persistent rise in risk sentiment is limited as long as it coincides with tightening liquidity from rising bond yields.

The chart from McKinsey that has circulated for years measured global debt to GDP at some 87% in Q4 of 2000 versus some 199% and rising by Q2 of 2014, so the ability to do something akin to the 1998-2000 period (a combination of both viciously rising bond yields and equity markets) is non-existent.

If we’re to see anything beyond a modest further melt-up in equities, yields will need to remain contained or fall, a development we would argue is not possible as falling yields from here are only possible on concerns for the outlook or the return of the central bank policy punchbowl on said concerns. Until then, rising yields and rising risk sentiment will become an accelerating game of chicken – much like the episodes just ahead of the early 2018 and late 2018 equity market meltdowns.

Trading interest

AUDNZD – the blow off rally overnight took the pair to our near-term target of 1.0700+ – may be more in the tank for the longer term, but we stand aside here.

A strong close in AUDUSD above 0.7200 after tonight (post the latest AU jobs numbers, which could encourage or spoil the rally) could see us taking the bait for longs for a move to the higher resistance above 0.7300.

We’ll be back next Tuesday due to holidays here in Denmark. Until then, the most interesting next steps for this market should be the flash EU April PMI’s and US Retail Sales data for March up tomorrow. A modest improvement from the March survey is expected in the former and a sharp bounce-back from a weak February expected for the latter. As well, we are on the cusp of earnings season, a critical test for equity markets perched near the highs for the cycle.

Chart: EURCHF

EURCHF is trying to vault its 200-day moving average and is pulling up through the last shreds of the local trading range since last October – the highest daily close since then was 1.1415. The persistence of the move is worth noting and fits with the JPY weakness on the recent rising global bond yields. Franc weakness can extend further as long as the global melt-up scenario continues to engage, though we suspect the headroom is somewhat low as long as bond yields are rising.