The Australian dollar rallied after China steadied the ship

Market Analysis /
Greg McKenna / 04 Jul 2018
  • The Aussie dollar traded with the Yuan and Chinese markets over the past 24 hours - down and then back up. 
  • That leaves it at 0.7385 midway between the range top at 0.7345 and this week's low around 0.7315.
  • The fall in copper and industrial metals suggest some caution ahead of today's very important May retail sales release. 

The criticality of the linkage with China, its markets, and the Yuan for the Australian dollar was writ large yesterday as the acute weakness in the Yuan and Chinese stocks when trade started translating to some heavy selling pressure for the Australian dollar which traded down to the lows around 0.7312/15. 

That the mooted market intervention by Chinese state banks - buying the Yuan above 6.70 against the USD - and then verbal intervention from the PBOC governor who said "seek to keep the yuan at a stable and reasonable level" settled markets also helped the Aussie was a natural result of the strong actual and psychological linkages between the two economies and their currencies. 

It's also helped the Aussie that the US dollar is under a little pressure as well. Though if the data keeps lifting the way it has already from the US and non-farm payrolls are part of that trend US dollar weakness won't last too long. 

Click on me, I'll expand
Click on me, I'll expand

But when I look at the moves in copper and industrial metals overnight and those linkages with the Aussie dollar I'm given pause to contemplate just where the Aussie should actually be sitting right now. 

Maybe around mid-range, given competing forces, is about right. 

That makes the release of today's retail sales report for May very important. Along with the NAB business survey and the Westpac consumer sentiment releases, retail sales give a light into the window of the outlook for the Australian economy. Yesterday's statement from RBA governor Lowe made it clear he remains an optimist about growth but is genuinely worried about the outlook for consumers and households carrying high debt and with low wages growth.

Today's print for retail sales is expected to be a solid 0.3% after the 0.4% rise in April. 0.2% either side of that and we could get a big reaction in markets and the Aussie dollar.

Click on me, I'll expand
Click on me, I'll expand

Looking at the charts even though we saw new lows printed for the Aussie dollar the preconditions fpr a base seem to be building as long as 73 cents can hold. 

Overall the primary downtrend remains intact though. 

On the day, resistance is 0.7415 and then 0.7445/50 and 0.7472/77 with support at 0.7370, 34, then 0.7315. 73 cents looks to be building into a very important level to watch though.

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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