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Update: Australian Dollar Shakes Off Chinese Trade Data, Advances on Pound, US Dollar

 

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The Australian Dollar is looking to cap off another strong week having recorded fresh advances against both Sterling and the Greenback on Friday January 13.

There is however a sense that the Aussie should be doing better were it not for some damp data out of China ahead of the weekend.

“Mixed Chinese trade data which, in local currency terms show exports still growing and imports not slowing as much as expected, but exports in dollar terms falling sharply, delivering a negative knock on to Australian market sentiment," says Mike van Dulken at Accendo Markets.

China's trade balance for December read at 40.82BN, below the 46.50BN forecast by analysts with exports slipping 6.1% on an annualised basis, worse than forecasts for a fall of 3.5%.

Meanwhile imports rose 3.1%m ahead of expectations for 2.7%.

If that increase in imports is good for Australian imports then this data is positive for AUD, however commodity prices fell on the overall dynamic that suggests perhaps the Chinese economy is slowing faster than expected. 

Therefore, the price of Australia's exports could presumably go lower.

“Australia’s ASX, is in the red (close to weakest since early December) as banks and miners weigh heavily with oil and metals prices (base and precious) back from recent highs,” says van Dulken.

The data has certainly taken some of the shine of what has been an impressive rally for Australia's currency.

GBP/AUD Forecast Higher Still

The Pound to Australian Dollar exchange rate (GBP/AUD) is suffering sustained selling pressure having started the year at 1.71 and subsequently falling to the 1.62's we are witnessing at present.

The bulk of the declines have been made in the week starting January 9 and we believe the Pound is poised to make considerably more losses. 

The GBP/AUD has now broken decisively below a key trendline, and this advocates for further weakness.

When exchange rates break below trendlines there is a theory, backed up by empirical evidence (see Pring, Technical Analysis Explained), that it will fall roughly the same distance below the trendline as the length of the move before the trendline.

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I have marked the move prior to the trendline as ‘X’ on the chart below, and the expected move after as ‘Y’.

This indicates that the next move is likely to take the exchange rate down to a target at 1.6000.

Our initial target, however, is 1.6320 where the S3 monthly pivot is as pivots tend to act as barriers of support in a downtrend.

The steepening MACD, which is now nosediving below the zero-line is a further indication that the exchange rate is likely to move lower as it is a sign the trend is now bearish.

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Carney’s Testimony Fails to Prop up Pound

The Pound really should be higher, were it taking cues from traditional sources, such as the Bank of England.

The Banks Governor Mark Carney gave testimony to the Treasury Select Committee mid-week, and what he said was certainly positive.

Carney noted the EU has more to lose from a hard-Brexit than the UK does; something that would suggest the EU will have to lean on a favourable Brexit deal for the UK.

"I am not saying there are not financial stability risks in the UK, and there are economic risks to the UK, but there are greater short term risks on the continent in the transition than there are in the UK," Carney told law-makers.

The Governor also noted the Bank may have to raise forecasts for the UK economy in 2017 thanks to its continued outperformance.

The comments failed to boost the Pound.

Trump Press Conference Sees Dollar Dumped, AUD Profits

Meanwhile, the Australian Dollar had reason to jump.

The big foreign exchange event over the course of the past 24 hours has been the capitulation in the US Dollar following Donald Trump’s much-anticipated news conference held mid-week.

Trump gave no firm details on economic policy which was required to keep the Dollar train steaming ahead.

“After his free-ranging comments the USD has fallen. Most of its peers have traded higher,” says Kymberly Martin at BNZ in Aukland. “As the USD has subsequently fallen, the AUD and NZD have pushed higher.”

The NZD/USD and AUD/USD have gained; from mid-week lows near 0.6960 the NZD/USD now trades at 0.7080.

“This is aligned to the 200-day moving average. The AUD/USD has also broken higher to now trade around 0.7460. Its 200-day moving average is now in sight, at 0.7501,” says Martin who says both the NZD/USD and AUD/USD will  likely remain at the whim of global market sentiment and direction of the USD.

Aussie Maintains Investment Appeal Despite Economic ‘Bumps’

The remained surprisingly resilient despite poor Retail Sales data which showed sluggish growth of 0.2% in December month-on-month, when economists had forecast 0.4%.

The currency’s strength may be due to the continued relatively strong performance by the Aussie versus its G10 peers both from the perspective of interest rates and ‘real’ yields according to research by Societe Generale (SocGen).

Real yields are the difference between interest rates and inflation and when they are high they show investors stand to gain more after inflation erosion.

SocGen’s FX Stretgist Kit Juckes says that real yields are a better guide to currency performance than nominal yields.

If he is right then it is no wonder the Aussie has so starkly outperformed the Pound, given the former is at the top of the G10 real yield league table and the latter is at the bottom.

 

 

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