The Australian Dollar (AUD) has regained momentum against the US Dollar (USD), with the AUD/USD pair trading above the key level of 0.6700. This upward movement comes as global market sentiment improves, alongside a notable decline in the USD, fueled by ongoing tariff threats from the United States to various European nations.
As of now, the AUD/USD has reached multi-day highs, benefiting from a broader positive sentiment in the risk-associated markets. The recent pullback in the USD is attributed to reactions from investors regarding President Trump’s tariff discussions, particularly those involving several EU countries. The focus now shifts to Australia, where the upcoming labor market report, set for January 22, 2024, is anticipated to play a crucial role in shaping market expectations.
Current Economic Landscape in Australia
Despite some signs of economic cooling, Australia’s recent data releases have not raised significant concerns. Growth remains stable, aligning with the narrative of a soft landing. The December Purchasing Managers’ Index (PMI) figures indicated slight declines in both the Manufacturing and Services sectors, yet both indices remain in expansion territory. Retail sales are holding steady, and the trade surplus narrowed to A$2.936 billion in November, maintaining a positive outlook.
The Gross Domestic Product (GDP) grew by 0.4% quarter-on-quarter in the third quarter of 2023, down from 0.7% previously. However, annual growth held at 2.1%, consistent with forecasts from the Reserve Bank of Australia (RBA). The labor market is gradually cooling, with a decrease of 21,300 jobs in November, yet the unemployment rate remains steady at 4.3%, suggesting moderation rather than direct weakness.
Inflation continues to be a significant concern. The headline Consumer Price Index (CPI) inflation eased to 3.4% in November, while the trimmed mean measure declined to 3.2%. Both figures remain above the RBA’s target range, indicating ongoing price pressures. Notably, the Melbourne Institute’s consumer inflation expectations have decreased slightly to 4.6%, down from 4.7%.
Influence of China on the Australian Dollar
China’s economic performance continues to provide some support to the AUD, though the impact appears less pronounced than in previous cycles. The Chinese economy grew at an annualized pace of 4.5% in the final quarter of 2023, with retail sales rising 0.9% year-on-year in December. While these figures are solid, they do not match the robust growth that once propelled the AUD significantly higher.
Recent indicators from China show tentative improvement, with both the official Manufacturing PMI and the Caixin index returning to expansion territory at 50.1 in December. Services activity has also strengthened, with the non-manufacturing PMI at 50.2 and the Caixin Services PMI remaining strong at 52.0. Trade data has been particularly encouraging, with a surplus of $114.1 billion reported in December, driven by a 7% increase in exports.
Despite these positive signals, inflation in China remains mixed, with the headline CPI unchanged at 0.8% year-on-year in December and the Producer Price Index (PPI) reflecting a negative trend at -1.9%. This suggests that deflationary pressures are still present in the economy, leading to a cautious stance from the People’s Bank of China, which has maintained steady Loan Prime Rates.
The RBA has recently adopted a cautious yet resolute approach, holding the cash rate steady at 3.60% during its latest meeting. Governor Michele Bullock emphasized that the central bank is not in haste to implement rate cuts, signaling a willingness to tighten further if inflation does not improve. The December meeting minutes revealed ongoing discussions among policymakers regarding whether financial conditions are sufficiently restrictive, indicating that rate cuts are not imminent.
Positioning data from the Commodity Futures Trading Commission indicates that bearish sentiment around the AUD may be waning, albeit without strong conviction. Speculative net short positions have decreased slightly, reflecting a more cautious stance among traders. Open interest has also diminished, suggesting that new investments are being approached with hesitation.
Looking ahead, market participants are keenly focused on the upcoming labor market report, which is expected to serve as a key domestic catalyst. The AUD remains particularly sensitive to shifts in global risk sentiment and concerns regarding China’s economic outlook. A significant risk-off event or renewed strength in the USD could hinder the Australian Dollar’s upward trajectory.
The technical landscape indicates that the AUD/USD pair faces notable resistance at the 0.6800 mark. Should this level be surpassed, it would signal a more convincing bullish trend. Conversely, if selling pressure resumes, the pair may revisit key support levels at 0.6659 and 0.6592.
In summary, while the Australian Dollar is exhibiting signs of strength, it remains influenced by external factors, including global market dynamics and developments in China. A decisive break above 0.6800 would be necessary to establish a more optimistic outlook for the currency in the near future.
