The Australian dollar jumps on hopes of a ‘great’ trade deal

• The Australian dollar jumped against all of the major crosses on Tuesday, the exact opposite performance to a day earlier.
• Renewed optimism behind a potential trade deal between China and the US largely explains the move, along with some short-covering.
• Australia’s Q3 inflation report will be released today. The economic calendar elsewhere is also jam-packed.

The Australian dollar rose strongly against all of the major crosses on Tuesday, continuing the choppy price action seen in recent weeks.

Here’s the scoreboard at 8am in Sydney on Wednesday.

AUD/USD 0.7105 , 0.005 , 0.71%
AUD/JPY 80.33 , 1.09 , 1.38%
AUD/CNH 4.9523 , 0.034 , 0.69%
AUD/EUR 0.6262 , 0.0061 , 0.98%
AUD/GBP 0.5590 , 0.0078 , 1.42%
AUD/NZD 1.0836 , 0.0028 , 0.26%
AUD/CAD 0.9315 , 0.0049 , 0.53%

After tumbling a session earlier on heightened risk aversion and renewed weakness in the Chinese yuan, the AUD/USD recovered most of those losses on Tuesday, boosted by hopes that a trade deal may be struck between the United States and China.

“I think that we will make a great deal with China and it has to be great, because they’ve drained our country,” Trump said in an interview with FOX News.

However, Trump confirmed that should a deal not be struck between the two nations, he was willing to slap tariffs on all Chinese imports entering the United States, adding to the $250 billion worth of goods that already subject to tariffs.

“I have $267 billion waiting to go if we can’t make a deal,” Trump said.

Despite the caveat on the prospect of a “great” trade deal, markets ignored that threat, pushing risk badets, including the Aussie, higher during the session.

A large and abrupt strengthening in the onshore and offshore-traded Chinese yuan midway through the Asian session, along with a rebound in Chinese stocks on reports of more measures being rolled out by Chinese policymakers to support stock prices, helped to push the AUD/USD back above the .7100 level in Europe.

Despite a subsequent weakening in the offshore traded yuan later in the session, the Aussie did not mirror that move on this occasion, eventually hitting a high of .7122 before ending the session at .7105.

Given the price action seen on Tuesday, it appears that elevated levels of short speculative positions being held in the Aussie may be prompting profit-taking from some traders.

Against the major crosses, the Aussie put in an even stronger performance, especially against the Japanese yen, euro and British pound.

The move against the yen reflected an improvement in risk appetite during the session. A weak Eurozone Q3 GDP print, including a flat GDP result from Italy, weighed upon the Euro.

The GBP was the worst performer for the session, weighed down by renewed concern towards Brexit negotiations.

“No Brexit news appears to be weighing on the pound as the clock keeps on ticking and politician edge ever so closely towards a now deal,” said Rodrigo Catril, Senior FX Strategist at the National Australia Bank.

“S&P overnight noted that the risk of a no-deal outcome had increased sufficiently to become a ratings consideration, and the ratings agency forecast a moderate recession in the event of no-deal.”

Turning to the day ahead, the economic data flow will go up a notch or two with major releases scheduled in Australia and abroad.

Domestically, the main highlight will be the release of Q3 CPI data at 11.30am AEDT. Both headline and core CPI are expected to undershoot the RBA’s 2-3% annual target, although such an outcome is already expected by policymakers at the bank.

This 10-second guide has more on what to expect.

Alongside the CPI report, the RBA will also release private sector credit growth for September, including growth in housing credit. Given the downturn in the Australian property market has been largely driven by tighter lending standards, rather than a drop in demand, the latter figure will be watched closely.

Regionally, official China PMIs for October will be released at midday AEDT. New Zealand business confidence — a market-mover in recent months for the NZD — will also arrive at 11am AEDT.

Adding extra spice to the session, the Bank of Japan will also announce its October monetary policy decision, including updated economic forecasts, at some point at or after 2pm AEDT. Unfortunately, even in 2018, the BoJ still doesn’t see the need to provide an actual release time.

Later in the session, other highlights include Eurozone inflation, German retail sales, Italian and Spanish CPI, Canadian GDP along with the latest ADP National Employment report from the United States ahead of the payrolls report on Friday.

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