Is New Aussie Strength Sustainable?

The Australian dollar is presently strengthening against most of the other major currencies as it has acquired fresh support from a spate of promising indicators published by China. The second biggest economy in the world has recently posted figures disclosing that its investment, retail sales and industrial production all expanded during August. Australia always reaps rewards whenever its giant neighbor performs well as China is its biggest exporter consuming nearly 30% of all Australian produced goods. The following diagram clearly identifies the strong correlation between the performances of the AUD/USD (blue line) and the Shanghai Stock Market (red line).

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So, will the Aussie continue to extend its gains? As you can now confirm, the primary catalyst behind the AUD/USD advancing higher within its present bullish channel is continuing improvement in the Chinese economy.

 

What is needed to Support the AUD?

A stronger Chinese economy influences the Australian dollar in numerous ways, such as the following:

1. The possibilities are dramatically reduced that the Royal Bank of Australia (RBA) will contemplate instigating further cuts in its benchmark interest rate or introduce additional monetary easing policies.

One of the main factors that the RBA evaluates when devising future policy decisions is that health of its national exporting market because of the significance of Australian commodity exports. Consequently, a powerful Chinese economy ensures the strength of this important sector reducing the need for any imminent RBA corrective actions.

A steady interest rate is beneficial for the Australian dollar as it reduces the negative impacts of devaluation.

2. Australian terms of trade receive a boost whenever the Chinese economy projects an improving status, which again generates the positive knock-on effect of strengthening the AUD.

 

What You Should Focus on

The Aussie now appears to be entering a new phase of bullish growth after residing in the doldrums for a number of years. Admittedly, there are a number of major resistance levels in its path. However, many currency specialists are advising that they have concluded that the AUD now has enough fundamental momentum to drive higher against the US Dollar.

For example, better-than-expected Chinese economic data, a disappointing US job report for September and an Australian Federal election are all helping the Aussie to strengthen despite present geopolitical dramas occurring across the globe. Specifically, if the US Federal Reserve now feels compelled to postpone any stimulus tapering because of fragile state of the US labor market, then this could be a bearish event for the US Dollar causing the AUD/USD to surge higher.

The average monthly number of jobs created by USA employers is now only 160k, which is well below Fed expectations. Although the unemployment rate has dropped to 7.3%, this decline has primarily been caused by a slump in the US labor participation rate which is currently recording its lowest reading since 1978.

In contrast, the AUD is gaining impetus from signs that the economy of the world’s second largest economy is on the mend and from a pending national election. For example, Chinese exports grew in August by an impressive rate registering an August increase of just over 28 billion compared to almost 18 billion recorded in the previous month. Although imports posted a weaker-then-expected number for August, they were still healthy and robust. In addition, investor confidence is also expected to acquire a significant boost from a new Australian government which is predicted to bolster the AUD.

 

Conclusion

Despite this rosy outlook, the AUD still needs to conquer a number of important obstacles if it is to realize its new potential and climb higher against the greenback. Technically, a major AUD/USD resistance zone is located between 0.9360 and 0.9360. In order to sustain a clean break above this area, the Australian dollar will need to acquire fresh support from the future release of more encouraging national and Chinese economic data. Should this turn out to be the case, then you can expect the AUD/USD to continue driving upwards.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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