Aussie declines amid broad slowdown, but could stabilize

The recent slew of global PMI data suggests that business confidence is declining. The problem is not unique to Asia, and fears of a hard China landing are too premature to judge. The broad slowdown coupled with domestic concerns in Australia has placed significant weight on AUD. We could see some stabilization soon as we approach the second test of support in the AUD/USD pair, but expect some nail-biting below 0.9000.

June PMI figures shouldn't start a panic. Although China's HSBC manufacturing PMI continues to decline off  Dec-2012 highs, and move deeper into contraction territory, it does reflect the broader economic shift. Recent reports show a slight average improvement in China's service PMI's, but average manufacturing confidence is declining more strongly. Chinese data will disappoint amid the government's agenda for economic reform instead of short-term stimulus. With an inflated housing sector - as property companies now post larger losses - stimulus could further exacerbate the problem. Also the growth in credit is still ripe, with the recent spike in SHIBOR rattling the shadow banking sector. Thankfully conditions have calmed, and Chinese policy seems more structural and concerned for the long term. On the flip side, Australia is facing reality, especially with recent RBA comments shedding light on its economic vulnerability.

Australia ranked the lowest in service PMI output in June against other major countries, and the manufacturing side is not stellar. The recent moves in AUD/USD are very telling. Wednesday's batch of data sparked an early rise in the pair even amid weak Chinese PMI data, disappointing Aussie retail sales and housing prices were released. The focus was on the trade print which marked a May surplus to $670M, but the AUD rise was short lived. The pair continues its descent, struggling to recover from that significant drop off 0.9550 after the FOMC event last month. The first test of support around 0.9300 failed, and now we're below 0.9200 with a clear eye for the next test of support around 0.8500. At that point, we could see some stabilization as the pair becomes increasingly over-sold. But keep in mind that a strong rebound amid the macro strain is not likely. The market should get comfortable with these levels after the glory days of the AUD rise have now come to terms.

Even though the May trade print was good, showing a solid 4% gain in exports, comments from RBA Stevens supports a more dovish view. It's quite possible that the RBA had a rate cut on the table at the past meeting, which was longer than usual and had Steven's speaking out about the need for fiscal responsibility and assuring that the RBA would "cut rates further if necessary to support an economy transitioning from a mining boom." With that possibility, expect further weight on the pair. As weaker Chinese data lingers and the resource boom peaks at home, the RBA seems confident in the weaker AUD as sentiment fades. Moves below 0.9000 could make the board happy, but maintaining a dovish tone is needed to cap those moves.