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Australian Dollar Entering a Period of "Relative Strength" says Westpac

© Taras Vyshnya, Adobe Stock

- AUD rises broadly even after disappointing November trade data.

- And can go on rising this quarter says technical analyst at Westpac.

- As market has rejected key pivot point, suggesting trend reversal likley.

The Australian Dollar advanced against most rivals Tuesday even after official data revealed a steep fall in the nation's trade surplus for November, and is likely to remain on its front foot over the coming weeks according to Westpac.

Australia's goods trade surplus fell from a downwardly-revised $2.01 billion to $1.93 billion during November when economists had looked for a surplus of around $2.18 billion.

"This was largely due to strong rises in the volatile civil aircraft component and an increase in automobiles. The latter is unlikely to continue, given the consistent falls seen in car sales. The monthly rise in export values was largely attributable to the volatile non-monetary gold segment," says Jack Chambers, an economist at Australia & New Zealand Banking Group (ANZ).

Exports grew by 1% in seasonally adjusted terms to $38.44 billion in November but imports rose by 2% to $36.52 billion at the same time, leading to a narrower surplus. But that narrowing comes after a steep increase thoughout the year, with the surplus having been just $1.08 billion in January 2018.

Currency markets care about trade balance data because it provides insight into supply and demand of a currency in the "real economy", while also giving a steer on the likely pace of GDP growth in a given period.

For exchange rates a narrowing deficit suggests either that exports and their associated demand for a currency are rising, or that imports and their associated supply of a currency are falling. Both are typically good for a currency while a steadily narrowing trade surplus, or a widening deficit, is a negative influence.

The size and trajectory of a trade surplus or deficit is important for economic growth because imports are a subtraction in the calculation of GDP, while exports represent a credit to the value of economic output. As a result, rising exports and, or, falling imports can help boost an economy.

"The trade balance has been in a surplus position for ten straight months. Strong export volume growth of iron ore and gas has helped. Imports have also been relatively subdued although there was a strong bounce back in goods imports in October," says Belinda Allen, an economist at Commonwealth Bank of Australia

Allen says the "run of surpluses" will continue for a while to come in Australia but that they could be "limited in size" in the short-term because many commodity prices began falling again back in November.

The AUD/USD rate was quoted -0.04% lower at 0.7141 Tuesday but is up 1.3% for 2019. The Pound-to-Australian-Dollar rate was down -0.48% and has now fallen 1.6% this year. Australia's Dollar was higher against all G10 currencies other than the Japanese Yen for the session. 

Investors and traders have returned from the festive break in a brighter mood this year due to statements from U.S. officials that have suggested a deal to end the so-called trade war between the U.S. and China could be achieved over the coming weeks. This has lifted the Australian Dollar.

"Turnarounds in AUD crosses (esp. AUD/JPY) suggest a period of relative strength [is likely]," says Tim Riddell, a technical analyst at Westpac, in a presentation to clients. "Rejections of areas below 76.00 in AUD/JPY, below 0.6950 in AUD/USD and below 1.0450 in AUD/NZD suggest retracements of recent AUD downtrends."

U.S. Commerce Secretary Wilbur Ross encouraged this brighter mood Tuesday when after the lastest round of talks he told reporters; "There’s a very good chance that we’ll get a reasonable settlement that China can live with, that we can live with, and that addresses all the key issues."

This matters for the Australian Dollar because the currency is underwritten by Australia's mammoth commodity trade with China, which has seen the Antipodean unit develop a close correlation with the Chinese currency.

China's economy and currency were damaged last year after the White House imposed 10% tariffs on $250 billion of the country's annual exports to the U.S. And President Trump is still threatening to raise the tariff and to target all of China's remaining $267 billion of U.S-bound exports if a deal addressing its "unfair trading practices" is not reached before March.

That lingering threat had been stoking fears for the Chinese and global economic outlooks for months now, while also weighing on the Australian Dollar. But the New Year's brighter mood means there is now scope for the Australian Dollar to enjoy some respite from some of the selling pressures that drove the Aussie to a 9% loss against the U.S. Dollar last year. 

"The spike below 69.50 (key pivot now) was “rejected” indicating a trend reversal. AUD should form a series of retracements during 1Q’19 to test at least the 0.7300- 0.7470 area and could easily extend, despite some interim risk of pullbacks," says Westpac's Riddell.

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