Fundamental Analysis: Aussie Dollar Holding on to Gains

Fundamental Analysis: Aussie Dollar Holding on to Gains

The Australian dollar remains close to last week’s highs so far today as markets await the release of the RBA’s minutes early tomorrow morning. Among the major factors in the Aussie dollar’s favor have been progress in SIno-American trade talks. A set of overall strong data last week from Australia has also given support.

AUD-USD remains close to 10-day highs around 0.7150c, and AUD-JPY is above the important area of ¥79 at the time of writing. Only the euro has bounced slightly against the Aussie dollar, with EUR-AUD currently trading at about A$1.582.

Data and sentiment supporting AUD

Data last week was overall fairly positive for AUD. Tuesday night’s consumer sentiment came in much better than expected, confidence was higher in January among both businesses and consumers. The only significant negative was December’s Home Loans release which showed a drop of 6.1%, more than three times as bad as the expectation.

Chinese data is often mentioned in the context of the Australian dollar for a few reasons. The most important of these is the close trading relationship between the two countries, with the majority of Australia’s iron ore and nickel being exported to China. Last week’s trade data from China was a negative factor for AUD, given that it showed a significant decline in imports to the People’s Republic and a slight increase in trade balance. Conversely, indirect factors such as Chinese trade data did not seriously affect the Australian dollar’s fundamentals in general last week.

The USA’s treasury secretary Steven Mnuchin hailed what he called ‘productive meetings’ with Chinese negotiators in Beijing on Friday. Markets reacted positively to this and similar statements, spurring the Aussie dollar into an upward movement against most majors. Exactly how productive the meetings were remains unclear as this week begins and the talks move to Washington.

Trade talks central this week as well as the RBA’s minutes

The Reserve Bank of Australia is due to release the minutes from its latest meeting at 00:30 GMT tomorrow morning. As usual, traders will be looking especially at comments on inflation. As well as these, the bank’s appraisal of the risks to growth in Australia and key trade partners this year is an important factor.

Also very important for AUD traders this week is Thursday morning’s release of January’s employment change. The expectation is for a decline of about 6,000 from the previous figure, to around 15,200. If correct, this prediction would be a significant negative for the Aussie dollar.

Beyond the usual economic calendar, though, trade talks are an object of major interest. The potential of collapse and a return to ‘tit-for-tat’ tariffs is unlikely. However, negative reports would still be likely to hit AUD given the importance of Chinese trade for Australia’s economy.

AUD set to strengthen further this week

Fundamentals on the whole suggest that the Aussie dollar is likely to continue its gains this week against most majors. On the other hand, traders should not ignore the technical picture. AUD remains very close to overbought against the yen in particular, so a degree of volatility is probable for AUD-JPY at least.

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