AUD outperforms risk space on China optimism

Risk currencies have come back to life as reduced China concerns sparked a revival in the risk trade.

The US dollar lost further ground overnight despite some better-than-expected unemployment claims data (333,000 versus 336,000 consensus), and this helped fuel the risk recovery further. AUD/USD was a star performer and the ‘squeeze higher’ that analysts have been talking about has finally come to fruition. The move back above 0.90 took out stops on the momentum plays and also spooked some of the AUD bears out there. The pair managed to print a high of 0.9135 and is back in focus today, with the RBA’s monetary policy statement due out.

Tuesday’s statement was brief and the market is in desperate need of hints about further rate cuts. As expected, we saw downgrades for 2013 and 2014 growth, but importantly didn’t downgrade 2015 growth. It also seems the RBA is happy with the inflation run rate following the recent rate cuts and a lower AUD. The reaction with AUD/USD was a retest of the overnight highs in the 0.913 region.

From China today we have CPI (+2.7% vs consensus +2.8%), PPI, fixed asset investment, industrial production and retail sales all set to be released. Expectations will be riding high following yesterday’s solid trade balance reading and, should the data impress today, the AUD ‘squeeze higher’ might run a bit further. In fact, we feel even just consensus readings on China data will be enough to satisfy investors and promote the recovery. Sellers are likely to pile back in towards the 0.93 region, which has capped prices in the past.

Elsewhere in the risk space, GBP/USD held its ground above $1.55 and EUR/USD tested 1.34. Perhaps a stronger-than-expected German trade surplus drove sentiment, and the pair will be back in focus today ahead of French industrial production. The price action on EUR/USD is also looking positive after a close above the downtrend that has been in place since 2011. USD/JPY made a strong start to Asian trade today but has stalled heading into the 97 region. There are no real drivers of the price action in the pair in Asia today, but perhaps the BoJ monthly report deserves some attention with no major data due out of the US.

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