Aussie dollar steadies after big jump last week – – AFEX Special Cup Day Update – November 6, 2018

After an unusually quiet October, the Australian dollar has burst out of the blocks in November.  Already this month it has traded from 0.7065 to 0.7258 with a perfect storm of events initially enabling the Aussie dollar to recover to 5-week highs, before it settled around the 0.7200 figure.

It started last Thursday in Australia with the release of better than expected trade balance data.  A trade surplus of $3.02b was recorded versus market expectations of a $1.71b surplus and the previous month was upgraded from $1.60b to 2.34b.  The recent surge in commodity prices coupled with a lower AUD contributed to the surge in export revenue generated.

China then released manufacturing data that beat expectations and shortly after news began to circle the markets that China and the US were engaged in proactive trade talks.  Then adding to the positivity on Friday afternoon AEST was news that Trump had asked his cabinet to begin drafting a potential trade deal with China.

Calm was restored later in the session however, with Trump’s head of the National Economic Council, Larry Kudlow, reported as saying that while discussion were progressing, even if conversations go well between the respective Presidents, “it will still be a long, tough process.”

Prior to Kudlow’s comments moves towards the AUD had gained momentum and it shot higher to peak at 0.7258, before trading back down towards 0.7200 post-Kudlow’s comments, where it opened the new trading week on Monday.  At the time of writing on Monday afternoon, the AUD was little changed from the open ahead of another busy week in the economic calendar.

The RBA kicks things off with their annual Melbourne Cup day meeting.  However with market consensus expecting little change from the recent rhetoric, you might be best placed focusing on the Cup itself!  Keep a watch on the European runners, especially those with form over the 2-mile, like Magic Circle or MarmeloBest Solution is in my humble opinion the best horse in the race, but with no starts beyond 1 ½ miles, may be found wanting at the end of the ‘Race that stops a nation!”

I digress momentarily, back to the markets where politics is likely to remain the key driver of currencies with the US holding their Congressional elections on Tuesday November 6th.  The results of which will likely begin to flow through during Wednesday’s Asian trading session.  If the Democrats can win either of the 2-houses, this could cause some political uncertainty with Trump no longer holding the balance of power in that situation.  If that does eventuate, there could be some negativity placed on the USD, enabling the AUD to make further gains.

Looking at the charts, if the above events allow, we might see a squeeze back towards 0.7300, which was the previous high in September.  Failure over the coming days, however, for the AUD to move back towards Friday’s high of 0.7258 and the Australian dollar could be vulnerable to selling pressure and potentially move back into the October inner trade range between 0.7050 – 0.7145.

Over the longer-term, I’m paying close attention to China and their escalating debt levels.  I’m wary of a continued slowdown in the Chinese economy and potential defaults on state-owned debts, particularly in the property sector.  Any issues in China will most likely flow to the AUD where it acts as a proxy for China.  Couple this with rising interest rates in the US and I’m very wary of further downside for the Australian dollar leading into 2019.

James King
Head of FX Dealing, AFEX

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