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April 22nd, 2012 at 8:22 am

Will Chinese PMI Boost or Sink the Aussie?

The Australian Dollar went through a considerable bout of weakness recently. Most of the fundamental data, or at least its interpretation by market participants, suggests additional rate cuts by the Reserve Bank of Australia later in the year. Some even speculate that multiple rate cuts (0.50-0.75%) are already “priced in”, although this statement amounts to guesswork. So much can happen between now and future central bank actions that what is “priced in” today will be long forgotten and meaningless. Still, from the short-term perspective, the Aussie stabilized last week, finding support at the 1.0300 handle, with nice rebound to 1.0380 by closing on Friday.

Early Monday brings events, which could determine the intermediate-term fate of the Australian Dollar. First, the inflation data in form of the Producer Price Index for Q1 is set for release. The forecast calls for annual decline to 2.2% from 2.9%. Falling inflation makes it easier for central bank to cut interest rates, thus be detrimental to the AUD as carry trade instrument. However, the real market mover is the Manufacturing PMI from China, coming one hour later. Even though this is a flash, or preliminary reading, markets will pay attention. In recent months, this indicator created a lot of volatility in the AUD, with spreads often jumping to 20-30 pips at the release and immediate moves in range of 60-80 pips. Even though this is a flash, or preliminary, reading markets will pay attention. If the PMI rises above latest result of 48.3, preferably above 50.0, the Australian Dollar should rally. At the same time, if the PMI disappoints, the AUD could go into a sharp selloff.

Interestingly, from technical perspective the Australian Dollar is at important level. In case of the AUD-JPY, it is trying hard to turn bullish. The price is right at the key, multiple resistance of 84.75. If today’s data forces a successful breakout above this resistance, the price could rally about 200 pips, with time of course. However, if the breakout fails immediately, a significant selloff under 84.00 is likely to happen fast. The story is similar across most of AUD pairs.

The AUD-USD is a little further behind, but after establishing a solid resistance at 1.0300, it is trying to rally. Here, the immediate resistance is at 1.0390, which, if broken, should clear the path for advance to 1.0450 in the short-term. On even more ambitions note, if today’s data proves to be truly positive, the AUD-USD could easily extend gains to about 1.0600 within days. Alternatively, a failed breakout above 1.0390 will probably sink the price back to 1.0300 or even below. Either way, early trading today could be volatile.

Mike K.

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