THE AUSSIE, FX DARLING NO MORE

DIRECTOR OF CURRENCY RESEARCH, GFT

AFTER hitting a post-float high of Au$1.0250 to close out the year, the Aussie has suddenly lost its lustre, tumbling through the Au$0.9900 figure at the start of this week’s trade as the unit carved out an ugly double top formation on the charts. The devastating floods that have affected more than 200,000 people in the state of Queensland have not helped matters since the region’s mines, which produce nearly a third of the world’s coking coal, have been shut down. The country’s latest lacklustre data has also weighed on the currency as higher interest rates resulted in a sharp drop in building approvals and only modest growth in retail sales.

However, the real reason that the Aussie is falling has more to do with China’s economy than Australia’s. On Monday, China released its December trade balance data and, while overall trade continued to expand at a healthy pace, its trade surplus shrank considerably. Export growth has slowed more than expected, while imports expanded, rising 25.6 per cent. Overall, China’s trade surplus increased only $13.1bn versus the $22.9bn eyed.

For nearly two years, the Aussie has been the darling of the currency market, particularly since its G20-leading interest rate attracted investors and momentum traders alike. Yet concerns over the potential slowdown in China have weighed heavy on Aussie dollar-dollar. This dynamic started at the beginning of the year and continues to haunt the pair as traders reassess the prospect for further rate hikes from the Reserve Bank of Australia (RBA).

With China’s growth slowing, a devastating flood ravaging Australia’s key agricultural and mining sectors and consumer demand muted, further tightening from the RBA in this quarter appears unlikely. That’s why Aussie dollar-dollar – which only a few weeks ago looked like it would pull away from the parity to trade higher – may now find itself contained by its recent highs. Unless tonight’s employment data offers another upside surprise, the Aussie dollar-dollar may not be able to set fresh highs for the foreseeable future.