Will China's Production Continue To Fan Speculation?

With industrial production figures released last week, many in the market continue to speculate as to the duration of the current rebound in risky assets. Chinese manufacturing has experienced an ongoing advance over the last year. Subsequently, so too has investment and speculation in forex (FX) assets, namely in the euro, Japanese yen and the Australian dollar.

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The Money Down Under
The Australian dollar alone has gained 46% since March of last year - the same time when Chinese production rebounded and began its uptrend. Comparatively speaking, industrial production in the world's third-largest economy was meandering at an average of 6.4% in the fourth quarter of 2008. The measure has rebounded sharply, posting an average of almost 12% since March 2009. Looking ahead, the current trend isn't going to cool down any time soon. For the month of December, Chinese production increased 18%, the seventh double-digit gain and the fastest pace in 20 months. (Learn more in our Economic Indicators Tutorial.)

Helping to spur current growth has been government subsidies to manufacturing and export entities. Tax rebates for exporters have been extended with further government aid helping subsequent sectors as the Chinese administration injected approximately $600 billion in fiscal stimulus to boost construction and production sectors back in the second quarter of 2009, according to Bloomberg News. Should the industrial production figure post a month-over-month gain, the economy would be poised to post close to a 9% gain for the quarter, more than double the estimate set for the world's largest economy, the U.S.

Ultimately, with the Chinese scene helping to boost global confidence and spark further risk taking in FX, continued escalation of economic growth will likely support the trend. The only caveat remains in the central bank rate increases of late. With the policy makers keeping one eye open on the rate of inflation and foreign direct investment in the country, aggressive tightening measures may help to give some deterrence to the trend in the near term.

As We Look Technically
One such currency pair that has benefited handsomely from the recent run-up in risky assets has been the Australian dollar / U.S. dollar pair, due to a rather strong correlation that existed last year. The relationship extends further, as the Australian economy has expanded on the heels of Chinese demand for Australian manufacturing exports. As such, further speculation on risky assets is likely to boost the Aussie in the medium term. However, with the technical picture a little more downside leaning, bullish traders will likely have to wait a bit before re-establishing any upside positions.

The Bottom Line
Coming off of a presently forming triple top, the Australian dollar / U.S. dollar pair has the definitive potential to continue further through weak barriers, making the case for a stop at the 0.8250 price level. The aforementioned coincidentally lands atop the 38.2% Fibonacci level from 0.6300-0.9314 bull wave.