Australian Dollar Jumps Higher Against Pound, Euro and Dollar on Chinese Inflation Data

Chinese data is commanding direction in the Australian Dollar for the second day running - on Friday though the data is positive and the currency is higher.

The Australian Dollar is trading higher against the Euro, US Dollar and Pound Sterling ahead of the weekend courtesy of positive data out of China.

"The end of industrial deflation in China," has been heralded by some commentator as producer prices rise for the first time in four and a half years, cheering investors in Asia and the Aussie Dollar.

Annual CPI read at 1.9%, ahead of the 1.6% forecast by markets while annual PPI read at 0.1% ahead of forecasts for -0.3%.

"I think the inflation numbers were welcoming actually, pretty much unexpected. For corporate China is is good news as we have been saying, corporate have not been investing in China domestically. The biggest transformation has been that China has been an importer of net FDI rather than a recipient. We see this is good if we are looking for more corporate investing in China but we are talking about Capital escaping China," says Jinny Yan, Chief China Economist at ICBC Standard Bank.

What happens in China matters greatly to Australia who ship the majority of their exports - particularly commodities such as iron ore, coal and natural gas - to the world's second-largest economy.

"This is a positive sign for commodities, as it also confirms a sign of stability for global demand. Although if we combine this data with yesterday’s export and import number for China,  it paints a cloudy picture," says Naeem Aslam at Think Markets.

Indeed, just 24 hours earlier and the Aussie was on the backfoot thanks to soft trade data.

The country's trade surplus narrowed from CNY346bn to CNY278.4bn (analysts had forecast CNY364.5bn), with annual export growth (CNY terms) unexpectedly contracting from 5.9% to a seven year low at -5.6% (analysts had forecast +2.5%). 

Annual import growth slowing from 10.8% to 2.2%, forecasts were for growth of 5.5%.

No wonder the Aussie has taken a hit as traders will be concerned over what a decline in Chinese demand for Australian exports will do to the currency.

"GDP growth in Q2 and Q3 was propped up by a housing bubble and huge state stimulus, but there are signs that these support factors are fading," says Sue Trinh at RBC Capital Markets.

Latest Pound / Australian Dollar Exchange Rates

	Live: 2.011▼ -0.26% 12 Month Best: 2.1645
*Your Bank's Retail Rate	1.9426 - 1.9507
**Independent Specialist	1.9828 - 1.9909 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

GBP/AUD Recovery Still Possible

More upside for Sterling could chime quite nicely with the current chart outlook for the Pound to Australian Dollar exchange rate.

The spike lower on Friday was partially recovered and GBP/AUD ended the day leaving a chart pattern that resembled a very long hammer candlestick.

According to research, very long hammers, which form mostly below the lower Bollinger band have a high probability of marking exhaustion and a reversal in the trend.

Although there has been no sign of a reversal in the downtrend yet and over the last few days we have witnessed even more weakness for the pound, we expect the pair to eventually rally, with a move above the 1.6500 level signaling a continuation up to 1.7000.

For now we see the recovery as technical in nature but there are growing risks that it becomes more sustained if the Brexit debate moderates.

Australian Economy Strong, Brexit Debate to Become more Nuanced

Sterling is heavily dependent on headlines at present making it a tricky customer.

Calling Aussie strength is however a great deal easier owing to the stable and solid fundamentals underlying the economy.

Latest data for the Aussie was in line with the current trend for better-than-forecast releases, after Consumer Sentiment data showed a 1.1% rise in October to 102.4. 

Expectations rose by 2.1% to 98.8 and Current Situation – though falling 0.4% – still registered a relatively strong 107.8.

This followed on from last week’s strong Austrlaian Retail Sales and Trade data reports.

The central bank’s reluctance to cut interest rates any lower on the back of the data has further supported the Australian currency.

On Friday the next major piece of Australian data in the form of the Financial Stability report will be published, and this will impact on the Aussie because it will show how hot the housing market is.

If the Financial Stability report shows the housing market is still ‘overheating’ it will reduce pressure on the Reserve Bank of Australia (RBA) to cut interest rates.

A cut in interest rates would be negative for the Aussie as it would lead to a fall in foreign capital inflows searching for higher returns, but by leaving rates unchanged the Aussie could gain a boost.

For Sterling, the big day is Thursday October 13, as this is when Theresa May’s most powerful advisor, the Attorney General, Martin Wright, will go to court in London to try to convince the justices that the triggering of Article 50 should remain in the hands of the prime minister, and not be put to a vote in parliament which is mainly pro-EU.

The government has already suffered a defeat on Wednesday after it was forced to allow lawmakers to scrutinize its plans for negotiating Brexit.

The “Hard Brexit” stance adopted so far may well be criticized by MPs and the government forced to water down its approach.

Analysts at Morgan Stanley, however, argue that the tough stance may have more to do with adopting a strong negotiating strategy than principle, and if negotiators are forced to water down their approach, they may actually end up giving too much away in concessions and end up with a worse deal – which could be sterling negative in the long-run.

However, any sweetening of the current ‘Hard’ stance will be positive for the pound.