AUD/USD Outlook: China GDP in Focus Following Phase One Trade Deal

Australian Dollar Talking Points

AUD/USD trades in a narrow range even though the US and China sign the Phase One trade deal, and the muted reaction undermines the rebound from the monthly low (0.6849) as the Trump administration remains reluctant to rollback tariffs.

AUD/USD Outlook: China GDP in Focus Following Phase One Trade Deal

The recent advance in AUD/USD appears to have stalled as the US-China trade deal fails to spur a break of the weekly high (0.6920), and the Australian Dollar may face headwinds over the coming days amid the weakening outlook for global growth.

Data prints coming out of China, Australia’s largest trading partner, may undermine the recent rebound in AUD/USD as updates to the Gross Domestic Product (GDP) report is anticipated to show the growth rate holding steady at 6.0% in the fourth-quarter of 2019, the lowest reading since the series began in 1992.

Signs of stagnant growth may encourage the Reserve Bank of Australia (RBA) to endorse a dovish forward guidance at the next meeting on February 4, and the central bank may prepare Australian households and businesses for lower interest rates as Governor Philip Lowe and Co. insist that the board has “the ability to provide further stimulus.”

Nevertheless, it seems as though the RBA is in no rush to revisit its rate easing cycle as “the Australian economy appeared to have reached a gentle turning point,” but the US-China trade deal may become a concern for the central bank as Chinese officials pledge to boost purchases of US goods during a period of record-low growth.

It remains to be seen if the US-China trade deal will drag on Australian exports, but the RBA may further insulate the economy in 2020 especially as the International Monetary Fund (IMF) insists that “unconventional monetary policy measures such as quantitative easing may become necessary.”

As a result, the RBA may continue to push monetary policy into uncharted territory, and AUD/USD may face a more bearish fate over the coming months as the Federal Reserve moves way from its rate easing cycle.

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AUD/USD Rate Daily Chart

Source: Trading View

• AUD/USD has been capped by the 200-Day SMA (0.6893) for most of 2019, but the recent break/close above the moving average signaled a potential shift in market behavior especially as the Relative Strength Index (RSI) pushed into overbought territory for the first time since 2018.
• However, the bullish momentum appears to be abating as the RSI falls back from overbought territory and flashes a textbook sell signal, with the oscillator snapping the upward trend from December.
• In turn, the correction from the 2019 low (0.6671) may continue to unravel as it failed to produce a test of the July high (0.7082), with the opening range for 2020 highlighting a similar a similar dynamic as the exchange rate extends the decline from the December high (0.7032).
• Failure to clear the weekly high (0.6920) may spur range-bounce prices, but a break/close below the 0.6850 (78.6% expansion) region may spur a move towards the 0.6800 (61.8% expansion) handle, with the next area of interest coming in around 0.6720 (78.6% expansion) to 0.6730 (100% expansion).

--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.