Australian dollar falls on Weak China Data. Will AUD/USD test the lows?

Australian Dollar, China’s Economy, AUD/USD, PBOC, RBA, CGB – Talking Points

  • The Australian dollar gave back some gains overnight after weak Chinese data.
  • Industrial production and retail sales fell, as did investment.
  • The RBA minutes showed a rise, or no change was considered. Lower AUD/USD?

The Australian dollar fell on doubts about China’s economic recovery after statistics showed a slowdown in activity.

Chinese data today showed industrial production rose 5.6% year-on-year to the end of April, down from 10.9% and 3.9% in March.

Retail sales rose 18.4% in the same period, compared with 21.9% and 10.6% previously expected. Non-rural fixed investment and real estate investment also fell short of estimates at 4.7% and -6.2% respectively.

Today’s figures come on the back of weak inflation data last week, and the People’s Bank of China (PBOC) yesterday left the one-year medium-term lending facility (MLF) rate unchanged at 2.75%. However, it increased liquidity by CNY 25 billion.

Chinese 10-year government bond (CGB) yields remain close to 2.7%, the level they reached in November last year before the Covid 19 restrictions were lifted.

AUD.USD was up 68 cents overnight on a weaker US dollar, but eased back a little on growing concerns about Australia’s main export destination.

Ahead of the Chinese data, RBA meeting minutes showed that the decision to raise rates at the May meeting was a balanced one: “Members discussed two options: leaving the policy rate unchanged or raising the policy rate by 25 basis points.”

The decision to keep rates unchanged was mainly justified by the recent slowdown in inflation. The consumer price index was 7.0% at the end of March, down from 7.8% at the end of December.

The rationale for a hike pointed out that while price pressures appear to be easing, a renewed acceleration in inflation would extend the period during which the CPI remains above the target range of 2 to 3%. The Bank’s current forecasts put this target at mid-2025.

Australian labour market data will be released on Thursday, and a Bloomberg survey of economists expects the unemployment rate to remain unchanged at a 50-year low of 3.5%.

AUD/USD TECHNICAL ANALYSIS

AUD/USD has been trading in a range between 0.6565 and 0.6818 for the past 12 weeks after making a false breakout to the upside last week.

A false breakout is characterised by price moving outside the current range before closing the session back within it.

The area between 0.6785 and 0.6820 could be a resistance zone as there have been several previous swings in this area. On the upside, support could be at the previous lows of 0.6636, 0.6574, 0.6565 and 0.6548.

The 10-day, 21-day, 34-day, 55-day, 100-day, 200-day and 260-day simple moving averages (SMAs) are all between 0.6685 and 0.6788, and this clustering of SMAs could signal that the trading range could hold for now.

A final break above or below these SMAs could lead to a momentum build-up in that direction and a potential volatility breakout.

chart: Tradingview

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