Australian Dollar Strength Challenged by China Data, US Impasse
Fundamental Forecast for Australian Dollar: Bullish
We’ve argued in favor of a significant Australian Dollar recovery since early August. We thought an improvement in Chinese news-flow will help arrest the slide in economic growth expectations for the East Asian giant, boosting the outlook for Australia’s mining sector exports and prompting a positive shift in the RBA policy bets. The case for an upside scenario seemed all the more compelling against a backdrop of highly over-extended speculative net-short positioning and we proceeded to enter long AUD/USD after an attractive technical setup presented itself.
Prices turned higher as expected, with the COT data over recent weeks pointing to aggressive short-covering. Furthermore, not only have RBA interest rate cut expectations fizzled, but a gauge of priced-in policy bets from Credit Suisse now stands at the highest since June 2011 and calls for modest tightening over the next 12 months. The week ahead will test the Aussie’s resilience however amid a slew of top-tier Chinese economic data.
Expectations call for a supportive set of Chinese economic indicators. Third-quarter GDP figures are due to show the year-on-year economic growth rate accelerated to 7.8 percent, marking the best performance yet this year. September’s industrial production, capex and retail sales numbers are likewise tipped to show improvement. Needless to say, such outcomes would bode well for the Aussie.
However, Chinese news-flow notably flat-lined relative to expectations in September having shown strong improvements in July and August while recent pullbacks on PMI readings have been a bit worrisome. That leaves the door open for a downside surprise on one (or more) of the key indicators slated for next week, putting the Australian unit’s recovery at risk.
The risk of an adverse shock from macro-level forces remains significant as well. The Aussie is still significantly sensitive to broad-based risk appetite trends, with AUD/USD showing meaningful correlations to various measures of market sentiment including the S&P 500, the MSCI World Stock Index and DailyFX’s own Risk-Reward index. That makes for a vulnerability to the outbreak of risk aversion in the event that continued wrangling over the US budget in Washington DC fails to produce a deal before the October 17 deadline to raise the so-called “debt ceiling”.