MARKETS SPECTATOR: China to drive the Aussie dollar

With a deluge of Chinese data due out at 1300 AEDT, only an unforeseen downside surprise could stop the local dollar spiking.

It’s decision time for the Australian dollar with Chinese data due at 1300 AEDT set to determine sentiment.

The Australian dollar has had a very good run over the last 48 hours as optimism towards the state of the global economy continues to improve.

The big lift in sentiment came from the news late yesterday that Moody’s had concluded its review of Spain and not downgraded the country’s investment grade rating, which the markets had been speculating on. On top of that, US housing starts came in stronger than expected overnight, hitting the highest level in more than four years.

That saw traders dumping traditional safe haven currencies, like the yen and greenback and flocking to ‘risk currencies’ that tend to benefit from global growth like the Australian and Canadian dollars.

AUD/USD

image

Source – IG Markets

In the chart above, we can see that the Australian dollar has broken out through the short-term downtrend line and is now sitting just below the 50 per cent Fibonacci retracement level of the recent high to low. This level is acting as resistance which the traders have been using as a good place to take profits following the strong move higher.

According to Investopedia.com, Fibonacci retracements are a very popular tool used by many technical traders to help identify strategic places for transactions to be placed, target prices or stop losses. After a significant price movement up or down, the new support and resistance levels are often at or near these lines. The 50 per cent level is the most powerful of the levels.

Following this strong push higher, there has been some profit taking ahead of major Chinese economic releases due at 1300 AEDT AEDT today. GDP (expected at 7.4 per cent), fixed asset investment (20.2 per cent), industrial production (9 per cent) and retail sales (13.2 per cent) are all due out.

A senior currency strategist from NAB said a deluge of data from China, including Q3 GDP and retail sales for September, will shape AUD/USD trading in Asia. Assuming no significant downside surprises, expect the verdict of markets to be that China's slowdown probably bottomed in Q3, they said. The Chinese data is likely to give additional support to a recent revival in demand for the Australian dollar, possibly pushing the pair to 1.04 or above, they noted.

However, on the flipside, anything weaker-than-expected could leave the dollar susceptible to further falls.

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