Capital Trust Markets – On Monday evening, the Reserve Bank of Australia (RBA) will release its latest monetary policy meeting minutes. The release comes after a spate of data that suggests the economy of China is slowing, and as such, traders are especially eager to gain insight into RBA monetary policy.
Last weekend, the National Bureau of Statistics of China (NBSC) reported Chinese consumer price index (CPI) at 0.5%, missing expectations of 0.8%. Shortly after, the Peoples Bank of China (PBC) reported disappointing new loans at 645B, and as the week came to a close, the NBSC reported slower than expected industrial production growth at 8.6%.
The data hints that, contrary to many analysts’ forecasts, the economy of China is bucking its long-term trend and losing steam. Australia’s dependence on the Asian superpower puts it as first in line to feel the impact of a waning Chinese economy.
Australia is the world’s leading coal producer, one of the top six copper producers and its mines contain nearly 25% of global proven uranium resources. The vast majority of its resource exports goes to China; a trade flow that was instrumental in helping Australia avoid the most recent economic downturn. This dependence however, may yet prove toxic if the economy of China wanes.
If the disappointing data from China filters through to Australian releases, the RBA may choose to exercise control through its main policy tool: the nation’s interest rate. Australia’s interest rate is already at an all-time low of 2.5%, but if Chinese demand for its exports falls, it could have a negative effect on employment, consumer spending, and in turn, economic output. In response, the RBA may choose to cut interest rates, to stimulate borrowing and maintain growth.
Forex traders will look to Monday evening’s minutes to serve up a bias. Dovish minutes hint at a future rate cut, and will likely fuel a downside revaluation of the Australian dollar (AUD), whereas hawkish minutes, hinting at a future rate hike, will have the opposite effect. During Monday’s trading, the AUDUSD has recouped the majority of last week’s economy of China-driven losses, but look to the minutes release as a determinant of short-medium term direction.
The pair has recently broken through key resistance at 0.9050, and a hawkish release will reinforce this level as medium term support. In this scenario, and assuming a Monday close above the aforementioned level, look for an initial target at previous resistance of 0.9150. A dovish release will likely cause a break below 0.9050, which would offer up an initial downside target of 0.8950 and suggest a resumption of the longer-term downtrend.
All said, the economy of China is not the only determinant in the success of the Australian economy, but it plays a vital role in sustaining the nation’s growth. The more risk averse traders will undoubtedly be quick to redirect capital away from the AUD, despite its attractive interest rate, if Australian data starts to mirror that of its Asian partner.
Written by Samuel Rae – Currency Strategist at Capital Trust Markets
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