Capital Trust Markets – Expect considerable volatility in the strength of the Australian dollar on Monday evening as a host of key events look set to shape a medium term bias in the outlook for the currency.
First on the schedule is the much-anticipated Chinese purchasing managers’ index (PMI), slated for release at 21:00 EST. Consensus forecasts the figure at 50.3, a small increase on the previous month’s 50.2. Forty-five minutes subsequent to this release, HSBC will release its counterpart figure, with consensus forecasting HSBC manufacturing PMI unchanged at 48.1.
China has as-yet failed to divert investor attention from a potential economic slowdown, with data released throughout the latter half of March simply serving to compound the bearish outlook for the Asian superpower. A downside surprise in either release would cap off a month to forget, and likely serve up some AUD weakness as throughout the Asian session and heading into the European morning. Australian Prime minister Tony Abbott has done his best during the past two weeks to downplay any claims of Australian collateral damage in response to a Chinese slowdown, but politics aside, the fact remains that Australia relies on China for a majority portion of its export revenues. China also holds large investments in a number of Australia’s leading mining organizations, offering up the potential for a decline in sector specific employment in the wake of waning foreign demand.
Shortly after, the spotlight will focus directly onto the Australian economy, as the Reserve Bank of Australia takes the stage to report its latest interest rate decision and its accompanying statement.
Market consensus looks to favor a rise, or at the very least a hawkish statement, suggesting that, for now at least, the RBA is not concerned about any potential Chinese impact. The AUD strengthened versus the USD last week, with the pair posting its biggest one-week rise in two months. The gain broke the pair through its 200-day SMA, suggesting the longer-term downtrend may be weakening.
An interest rate hike (or a hawkish statement tone), coupled with an upside surprise in the Chinese data could carve out fresh yearly highs in the AUDUSD, with a close above in term resistance at 0.9280 validating an initial upside target of September/November resistance at 0.9435.
Conversely, disappointing Chinese data and a dovish statement tone (unlikely) will likely offer up some short-term weakness in the pair. Look for aforementioned resistance to hold and a break towards in-term support at 0.9155.
Written by Samuel Rae – Currency Strategist at Capital Trust Markets
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