The Australian Dollar: Aided by Chinese Data but Iceberg Ahead 

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- AUD pops higher on resilient Chinese economic numbers. 

- But RBA minutes, jobs data both icebergs in AUD's waters.

- Commerzbank flags technical resistance above 0.70 for AUD.

- ING sees GBP/AUD steady into year-end despite Brexit risks.

The Australian Dollar advanced forward Monday after the latest official figures cast China's economy in a resilient light, boosting sentiment toward all risk-sensitive assets, although there's a duo of domestic icebergs lurking further out in the waters of the new week that could yet topple the Aussie. 

China's economy grew at an annualised pace of 6.2% in the second quarter, down from 6.4% previously but in line with market expectations. However, the monthly data cast the economy in a much more resilient light. 

Industrial production grew at an annualised pace of 6.3% in June, up from 5% previously and far ahead of the market consensus for an increase of 5.2%. Meanwhile, fixed asset investment rose 5.8% when markets were looking for a 5.6% increase and retail sales rose 9.8%, up from 8.6% when economists were forecasting growth of 8.5%. 

The series of positive monthly figures have left the impression among analysts that momentum in the world's second largest economy gathered pace toward the end of the recent quarter. Furthermore, the end of June saw a ceasefire in the U.S.-China trade war agreed that could well have given Chinese growth a further boost this July. 

"Chinese June industrial production and retail sales data were both stronger than expected which has encouraged speculation that stimulus is having a positive impact," says Michael Every at Rabobank. "The strong performance of the AUDmade a few headlines, with the Australian currency often trading as a proxy for the Chinese growth outlook." 

Above: Australian Dollar performance Vs G10 rivals Monday. Source: Pound Sterling Live.

Australia's Dollar is underwritten in large part by a gigantic trade in raw materials with China, which means it's sensitive not only to fluctuations in resource prices but also developments in the Chinese economy. This means the June agreement between Presidents Donald Trump and Xi Jingping to avoid imposing new tariffs on each other and to return to the negotiating table is a double barreled dose of good news for the Aussie. 

With iron ore prices trading at multi-year highs the Aussie was already receiving substantial support from commodity prices, which may explain why the Antipodean unit has avoided new lows even after the Reserve Bank of Australia (RBA) cut its interest rate to new lows on two consecutive occasions this year.

However, some analysts doubt that materials prices will remain as high as they are now and many anticipate a renewed escalation of the trade war at some point. In addition, technical analysts are flagging 'resistance' on the charts that could well stall the recent advance seen in the AUD/USD rate this week. 

"AUD/USD last week recovered off the 61.8% retracement at .6914. The market is approaching a tougher band of resistance namely .7048/92. This is the May high and the July high so far, the 200 day ma and the downtrend. It is likely to hold the initial test. Further up resistance can be spotted at the .7207 February high," says Karen Jones, head of technical analysis at Commerzbank

Above: AUD/USD rate shown at daily intervals.

"The commodity outlook may start to prove less supportive. Recently strong iron ore prices are set to face some headwinds after speculation that China may manipulate the price. We expect a re-escalation of US-China trade tensions to weigh on AUD in the coming months, although the downside may be limited (0.685 level) given already short AUD positioning," says Rob Carnell at ING

Any increase in tensions between the U.S. and Chinese governments, which have been at loggerheads over the latter's "unfair trading practices" this last year, would weigh on the Aussie sooner or later. And that's without the domestic economy, which is weakening in the face of a faltering housing market and slowing global economy, throwing its own two pence in as some analysts expect that it will later this week.  

The RBA will release minutes of its July policy meeting at 02:30 London time Tuesday and markets will scrutinise them closely for clues about when the next interest rate cut will come. The bank cut Australia's cash rate to a new record low of 1% in July in an effort to lift inflation by stimulating economic growth through lower borrowing costs. 

"With less than 15bp of RBA easing priced into the next three RBA meetings cumulatively, the hurdle is low for the RBA minutes being seen as dovish this week, which is what we expect after the statement at the time of the last cut offered little forward guidance. The risk is also of a more material pull back in employment growth in Thursday’s labour data – a key input into RBA thinking," says Adam Cole, chief FX strategist at RBC Capital Markets.  

Above: Pound-to-Australian-Dollar rate shown at daily intervals.

RBA Governor Philip Lowe said earlier this month the bank would cut rates again only "if needed", seemingly suggesting that market bets on another rate cut before year-end may have been misplaced. RBC Capital Markets says Tuesday's minutes could make clear that further reduction to the cash rate is in fact likely in the months ahead. That might leave the Australian Dollar in grasping for support this week. 

RBC has told clients to bet on a fall in the AUD/CAD rate this week because the bank sees the Aussie being undermined by the RBA minutes and Thursday's jobs data, which will be important for the Aussie because the RBA has explicitly tied the outlook for interest rates to developments in the labour market.

The RBA says a sustained increase in unemployment will be met by action and it has been thus far because the 0.3% increase in joblessness since February has drawn two rate cuts. June's data is out at 02:30 Thursday.

"The RBA has both cut rates, and simultaneously reduced expectations for more easing, enabling the AUD to rally. Any further easing (-18bp priced in by end-2019) will be driven by labour data," says ING's Carnell. 

Carnell forecasts the Aussie will be undermined this month and into year-end by lower Australian interest rates, falling commodity prices and an anticipated breakdown of trade talks between the U.S. and Chinese governments. However, ING also projects a poor performance from Sterling over the coming months due to the ongoing Brexit process in the UK parliament. This is expected to see the Pound-Dollar rate remain pinned down at the 1.25 level into year-end. 

ING's Pound-Dollar forecast of 1.25, combined with its AUD/USD projection of 0.6950 in six-months time, translates into a GBP/AUD forecast of 1.7950. That's only a short distance above Monday's market price of 1.7851. 

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