Australian Dollar Down On China Data Misses, But Focused On Fed

Australian Dollar, Chinese Industrial Production and Retail Sales Data Talking Points:

• Chinese industrial production rose at its slowest pace since early 2016 in November
• Retail sales did much better but still missed forecasts
• AUD/USD was stung, but the wait for next week’s US monetary policy decision is probably limiting action

Fourth-quarter technical and fundamental forecasts from the DailyFX analysts are out now.

The Australian Dollar slid Friday on the release of disappointing Chinese economic data from two key sectors.

November’s industrial production rose an annualized 5.4%. That was well below the 5.9% markets had expected and the weakest print since the start of 2016. Retail sales for the same month also missed forecasts. They rose a still-respectable 8.1% on the year, but the markets had been looking for an 8.8% rise. Urban investment levels were slightly better than expected, rising 5.9%.

The industrial figures speak eloquently to the thesis that China’s economy is slowing as the year turns. It’s also very possible that rising tariff barriers and trade tensions with the US are now making their presence felt in the numbers. Markets will want to see signs of a workable trade deal between Washington and Beijing as soon as possible now.

The Aussie can act as the markets’ top liquid China-market proxy given Australia’s huge raw-material export links to the world’s second largest economy. It certainly seems to have done so in this case, sinking before the data and carrying on down after it.

On its daily chart AUD/USD remains above the downtrend channel which marked trade for much of this year, up until late November. The Aussie has been boosted by market caution about the likely extent of US interest rate rises this year, and by hopes that trade relations between China and the US will improve. Both countries are crucial to Australia.

The pair is edging toward the top of its recent short-term trading range, although it remains well below its most recent significant high. That was the 0.7395 hit on December 4.

It is worth remembering that the lack of interest rate support which plagued the Australian currency for most of the year remains in place and may have actually intensified. Rate futures markets now tip no increase in the record-low 1.5% Australian Official Cash Rate for at least eighteen months. All that has really changed is the extent to which markets believe US rates will outpace Australian.

With that in mind the AUD/USD market is likely to be stuck until at least next Wednesday when the Fed gives its final monetary policy dispensation of 2018. An increase will surprise no one, but the prognosis will be all important.

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--- Written by David Cottle, DailyFX Research

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