Australian dollar analysis: AUD rallies above 200DMA on China growth optimism
11:41, 9 January 2023
The Australian dollar (AUD/USD) surged over the major dynamic barrier of the 200-day moving average (DMA), reaching four-month highs, amid broader dollar weakness and as market optimism about China's reopening fueled gains in high-beta and commodity-linked currencies.
From a fundamental standpoint, recently there have been encouraging developments for the Aussie dollar.
China relaxed certain Australian coal export restrictions for the first time since the unofficial ban in 2020. Australia's terms of trade and current account surplus are projected to rise as coal exports to China resume and the country further lifts Covid-lockdown restrictions.
In addition to this, the steps taken by Chinese government officials to reopen the economy and give policy support for the recovery led to the Australian dollar being one of the strongest FX links to the improving Chinese growth outlook.
Over the past month, the Australian dollar has been the second-best-performing currency in the G10 space, only behind the Japanese yen.
1-month %change in major currencies vs USD – Chart: Capital.com, Source: Tradingview
Rate differentials now support AUD
On the monetary policy front, the AUD is underpinned by market expectations that the Reserve Bank of Australia would hike interest rates again this year to lower inflation. Investors are split on whether the RBA will raise interest rates again at its Feb. 7 meeting, while a peak of 3.85% is still projected later this year.
From a rate differential standpoint, the spread between 10-year Australian bond yields and the US Treasury has moved to positive territory (+15bps) during the last month, which has been an AUD supportive factor on the margin.
AUD/USD vs 10-year AU/US yield spread – Chart: Capital.com, Source: Tradingview
What is your sentiment on AUD/USD?
Global factors dominate AUD's trend
This week's new data will include the Australian monthly CPI and retail sales for November. The inflation rate is anticipated to grow to 7.3% from 6.9% previously, while retail sales are anticipated to rise 0.6% month-over-month (m/m) after a 0.2% m/m fall earlier.
Overall, I think that global forces (China's reopening and the dollar's weakening momentum) rather than domestic factors will continue to drive the Australian dollar's trend. Australian housing market data continued to show signals of a substantial slowdown, with a 9% monthly decline in building permits and the third consecutive monthly decline in private house permits (-2.2% m/m). However, the AUD was unaffected by the news overnight.
We've lately witnessed a high and positive correlation between the AUD and the Chinese yuan (CNH), as well as growth-sensitive commodities, so that's where the market's focus is right now.
AUD/USD and CNH/USD correlation since the start of Chinese reopening talks – Chart: Capital.com, Source: Tradingview
AUD/USD technical analysis: Trend reversal at play
The AUD/USD pair has broken over the 200DMA resistance at 0.684, breaching the 0.69 levels on January 9th, marking a 13% rise since the October 13 lows and reaching a four-month high.
Since the end of April 2022, the AUD has been trading below the 200DMA price ceiling. The current positive price action has now retraced 50% of the 2022 low-to-high range (the 50% Fibonacci level).
This may be a signal of a potential trend reversal for the pair. Over the last two months, the daily RSI has been hanging above 50, indicating that bulls now dominate the trend. Prices have also exceeded the Bollinger band's upper threshold of 2 standard deviations from the 20DMA.
In the coming days or weeks, if the 50DMA continues to rise at a faster pace than the 200DMA, a golden cross may take shape.
Overall, the technical picture appears to be supportive for a continuation of the AUD bullish momentum. Bulls would need to break convincingly over the 50% Fibonacci level in order to attack end-of-August levels around 0.70 and then target the 61.8% Fibonacci level at 0.709.
On the downside, the 200DMA (0.684) is now the first level of support, followed by the 38.2% Fibonacci at 0.674, the 50DMA and the 2023 lows at 0.67.
AUD/USD technical analysis (daily timeframe) – Chart: Capital.com, Source: Tradingview
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