AUD supported but be wary of profit taking

AUD/USD broke above its 200 day moving average (0.9137) encouraged by upbeat comments about economic growth prospects from Reserve Bank of Australia Governor Stevens. The fact that AUD remains supported despite higher risk aversion overnight is encouraging.

A run of better than expected data including Q4 GDP, retail sales, trade and jobs report have underpinned the currency. Additionally bad news is good in the case of the China impact on AUD as weaker data has led to growing expectations of a stimulus package to boost China’s economy.

Against the background of some improvement in risk appetite, and low volatility, the AUD looks like an attractive bet. My view has been consistently constructive on the AUD over past months and I remain of the view that there are further gains in store although in the near term profit taking is expect to emerge around resistance at AUD/USD 0.9342.

Impressive Aussie jobs data

Feb employment rose 47.3k in Australia, much bigger than expected (consensus 15k) while the unemployment rate remained at 6%. The components were positive, with full time employment rising by 80.5k and part time employment dropping by 33.3k. The participation rate rose to 64.8% too. AUD rallied following the release of the data and looks set to consolidate gains. However, upside may still be limited given the various headwinds of higher risk aversion and lower commodity prices, with AUD/USD 0.9133 set to act as near term resistance.

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AUD the “Teflon” currency

Despite further concerns about Chinese growth, following the release of the much worse than expected trade data over the weekend, AUD continues to hold gains above 0.90. Additionally declines in key commodities such as iron ore have done little to dent the enthusiasm for AUD. In this respect, AUD is fast becoming the new “Teflon” currency, helped by the neutral stance of the Reserve Bank of Australia and recently positive domestic data such as building approvals, Q4 GDP and January trade data.

The next major test for AUD will be Thursday’s release of the February jobs report. Clearly there has been a worsening in jobs conditions but the worst is likely over and after a decline in employment over the last couple of months some rebound is expected (our forecast +20k, consensus +15k).

AUD is set to consolidate over the near term, with technical support seen around 0.8980.

The week ahead

There are plenty of events to chew on over coming days including central bank decisions in Japan tomorrow and New Zealand on Wednesday. The Bank of Japan is unlikely to ease policy further so soon after its actions to boost loan growth while in contrast the RBNZ is set to begin its hiking cycle. On the data front US releases will still be weather impacted to some extent although February retail sales is likely to post a small gain. Moreover, Michigan confidence is set to rise, boosted by higher equity prices.

In Europe, attention will focus on industrial production releases in January, with French and Spanish IP data due to be released today. Overall production is likely to have expanded at a healthy clip of 0.4% MoM in the Eurozone as indicated by survey data. Finally, Australian jobs data is set to show some improvement on Thursday as the pace of deterioration in job market conditions slows.

In Asia the reverberations from the weaker Chinese data will likely impact sentiment across the region. Exports dropped by whopping 18.1% in February while imports rose more strongly than expected at 10.1% yielding a trade deficit of USD 22.99 billion. Central bank decisions in Korea and Thailand are on tap this week. Thailand is a close call, with risks of another policy rate cut but we expect the BoT to stay on hold. Currencies in Asia strengthened last week led by the IDR and INR. Gains this week will be morel limited, especially against the background of higher US yields.

Good data boosts AUD

Australia released some solid data this morning, with both January retail sales (1.2% MoM versus 0.4% consensus) and trade data (AUD 1433 mn versus AUD 100 mn consensus) beating expectations. Following on from yesterday’s better than forecast Q4 GDP data the news gave a boost to AUD helping it to break 0.90 versus the USD. The data especially retail sales highlights the growing strength of the consumer in Australia and reaffirms that the next move in policy rates will be up. Taken together with a firmer tone to risk appetite and the relatively solid 7.5% official growth target set for China’s economy this year, AUD/USD is set to remain well supported.

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No surprises from RBA

AUD was restrained ahead of the RBA meeting overnight but the unchanged policy decision and accompanying statement are set to leave the currency unperturbed. As reflected in the uptick in the February TD Securities inflation reading yesterday to 2.7% YoY the central bank has limited room for easier policy despite weaker job market conditions. Moreover, the RBA appears to be less concerned about the level of the AUD, and despite noting that the AUD remains high by historical standards there was no comment today about expecting further declines in the currency. Overall the statement was similar to last month.

AUD has held up well even in the face of weaker Chinese data and will face little damage from today’s RBA outcome, with strong support around AUD/USD 0.8821 and resistance around 0.8990.

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Geopolitical tensions to weigh on risk assets

There continues to be a disconnection between rising geopolitical risks as tensions between Russia and Ukraine intensify, and the performance of equity markets. US equities ended the week on a high note despite a bigger than expected downward revision to US Q4 GDP and risk sentiment overall remained supported according to our risk barometer. Other data were helpful for markets as February Chicago manufacturing confidence (PMI) and Michigan consumer confidence came in better than expected. The firmer tone to risk assets will not last, with risk aversion set to intensify today.

Markets continue to give US economic data the benefit of the doubt, downplaying the harsh weather impact on economic data. This is set to continue this week, with the release of a plethora of US data including January personal income and spending and February ISM manufacturing confidence, February vehicle sales, the Fed’s Beige Book, January trade balance and last but not least February non farm payrolls at the end of the week. All of the data will be hit by recent unseasonable US weather and therefore will look weak on balance, but markets will once again not fret a great deal.

There are several other key events this week that will garner market attention including central bank decisions from the Reserve Bank of Australia tomorrow, Bank of England, and European Central Bank on Thursday. Hopes that the ECB will easy monetary policy were dashed somewhat by a higher than expected reading for Eurozone HICP February inflation although there is still a possibility that some easing in liquidity conditions are announced. The RBA and BoE are not expected to change monetary policy settings this week.

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