The aussie’s big day

January 9, 2015

It’s going to be a big day for the Australian dollar with the release of important economic data out of China and Australia later in the Asia session. The ABS is due to release Australia’s retail sales figures at 1130AEST (expected 0.2% m/m) and we are expecting China’s inflation figures for December at 1230AEST (0130GMT). Consumer prices are expected to jump 1.5% y/y, slightly higher than the prior month’s 1.4% y/y increase but below the government’s official target. A lower than expected print today would provide even more incentive for the PBoC to cut interest rates again, and/or the RRR. However, the market is already expecting further action from the PBoC, thus AUD may not have the reaction most would expect.

How will the aussie react to China’s economic data?

The Australian dollar’s reaction to today’s Chinese economic data is hard to predict this time around. Depending on the mood of the market, softer than expected economic data from China can either weaken or strengthen the aussie. If investors think that the numbers are weak enough to push the PBoC to lower interest rates or otherwise attempt to boost growth, it can lead to a rally in the Australian dollar. This time around, we think a weaker than expected number will harm the AUD, as it would increase fears that the world’s second largest economy may still be heading for a hard landing.

Meanwhile, a better than expected number may provide the Australian dollar with a much needed boost. Inflation is a key measure for determining the health of domestic demand. And, given Australia’s reliance on China as source of demand for its goods, strong activity at the ground level in China bodes well for the Australian economy and, in turn, the AUD.

Watch AUDUSD

In the event of better than expected numbers we’ll be watching 0.8220 in AUDUSD, and in the event that the numbers disappoint and the aussie sinks, 0.8030 in the level to keep your eyes on. A break of 0.8030 may precede a test of an all-important support zone around 0.8000.

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