The Australian Dollar (AUD) is getting crushed. Market participants are on guard for more potentially market-moving data from China, now Australia’s biggest trade partner. The release of the next figures on retail sales and industrial production is sure to impact the AUD/USD currency pair. It is important for traders to be prepared for increased volatility. The U.S. federal government is back in business. Now, views on a potential Federal Reserve rate cut in December are mixed, which further complicates the market environment.
The AUD/USD pair has been trading lower than normal ahead of next week’s inflation data. The analysts have been saying that if this bad trend continues, it risks crashing all the way down to the November 4 bottom of 0.6481. Should this downward move persist, the next notable point of contention can be found at the August 21 state low of 0.6415. Providing consolation to AUD/USD buyers is the 100-day Exponential Moving Average (EMA) located at 0.6515. We hope that this level can be a grounding point during these chaotic times.
Anticipated Economic Data from China
In fact, China’s economic health is perhaps the most important contributing factor to the rise and fall of the value of the Australian Dollar. As Australia’s largest trading partner, any fluctuations in China’s economic performance directly affect AUD valuations. The next major data release in two weeks is expected to show positive industrial production growth. Analysts are forecasting it to be 5.5% YoY, a drop from 6.5% in the previous report. Unsurprisingly, this expected slowdown has turned many eyes toward China’s manufacturing sector and its overall robustness. This, in turn, could have a dramatic effect on demand for Australian exports.
The action comes as we await the latest retail sales data this Thursday. When combined with September’s 3.0% increase, analysts are looking for a year-over-year increase of 2.7% in October. Retail sales growth Retail sales rising slower than expected could be a signal that consumer confidence is starting to wane in China. That would mean less demand for Australian commodities, particularly iron ore, Australia’s single biggest export.
So positive or negative surprises in these key data points send market reactions in an overreactionary fashion. This daily tendency is a prime driving force behind the Australian Dollar and its pairs. If the data beats the forecast, it’s enough to send the AUD higher. Looking ahead, we see first resistance at the October 28 high of 0.6590.
Market Reactions and Resistance Levels
Market analysts are watching closely the key resistance levels for AUD/USD ahead of important data releases. If a string of encouraging news emerges from China, the initial line of resistance to the upside could cap it around 0.6590. We would run into additional resistance at the October 6 high of 0.6620 and the September 16 high of 0.6688. These levels are an important barometer, as traders gauge the fortitude of the Australian Dollar ahead of indecisiveness from rapidly changing economic factors.
If the data comes in worse than expected it could increase current downside pressure on the AUD/USD pair. Sentiment around possible changes to the Federal Reserve’s monetary policy is equally important. Expectations for a December rate cut are mixed. Consequently, the market is expected to be very jittery until more definitive signs are seen.
Broader Economic Influences
In addition to retail sales and industrial production numbers, other macroeconomic factors play a substantial role in the value of the Australian Dollar. Australia’s inflation rate, growth trajectory, and trade balance all have important roles in dictating currency strength. A strong trade balance has a positive impact on AUD valuation, as it demonstrates increased demand for exports, most notably, commodity exports such as iron ore.
Iron ore prices are not only the most important driver of the Australian economy, but crucial to understanding AUD price action. The global demand for iron ore is extremely volatile. These new pipelines not only drain trade balances, they affect currency valuations. Consequently, any negative movement in underlying commodity prices would add significant headwinds to AUD‘s domestic recovery.