Aussie dollar struggles to sustain rally as copper falls

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The Aussie dollar did really well yesterday on the back of the combination of a nice bounce back in retail sales, partial indicators which point to a solid GDP result today, the strength of the Caixin Chinese PMIs, and a pretty upbeat outlook for the economy from RBA governor Lowe after the RBA decided to leave rates o​​n hold yesterday.

That saw the AUDUSD rally as high as 0.7653 before dropping back to sit at 0.7610 this morning.

To me, that pullback seemed inevitable when I saw the extent of the pressure copper came under in Shanghai futures trade yesterday. It was down 3.3% before US futures then added to the losses dropping 4.41% to finish the day at $2.928 a pound.

Copper is important for Aussie dollar traders because for many it represents a bet on and the outlook for global growth.

That’s not what drove copper lower last night though as I have explained in my Markets Musing this morning.

But I do use the 10-minute charts of Shanghai copper and the AUDUSD price as a short-term directional indicator for the Aussie dollar. Which is why I say in the headline it is hard for the Australian dollar to sustain a rally when copper falls 4.4%.

That makes today’s release of Q3 GDP even more important for the Aussie and forex traders.

The market is expecting a print of 0.7%/0.8% which would deliver a year-on-year outcome of 3% to 3.1% for Australia. That’s a solid result and reinforces the RBA’s outlook for the economy. And that is an outlook which suggests the next move in rates for Australia is higher.

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But that outcome for GDP is also pretty much baked into prices here at the moment and one of the reasons AUDUSD hasn’t fallen further as the relationship with copper would suggest.

So, the Aussie is at risk after such a heavy reversal from the 0.7653 high, of a big fall if GDP were to print weaker than expected. Of course, a 0.9% or 1%+ number would see the strength return once again.

As I’ve written recently, it is up to the data to disabuse the naysayers and hand-wringers on Australia’s economic outlook and thus the path of RBA rates.

Yesterday’s data was enough to lift the Citibank economic surprise index from -22.8 to -16.5. But it’s still in negative territory, meaning data has still been printing worse than expected on balance.

If this Aussie dollar rally is to prove anything more than an ephemeral move within an overall deep and long-lasting downtrend, Australian data needs to continue to print in line with where the RBA says the economy is, and is heading.

In other forex market movements, the US dollar is on the march this morning as traders get some conviction – even if bond markets don’t yet have it – that the tax reform package will deliver the type of stimulus which will lift both growth and the possibility of a more aggressive approach from the Fed in the year ahead. It’s about time is all I can say and I’m expecting Euro to finish the year closer to 1.15. But the results of a big global investment bank survey I was part of yesterday showed that I’m one of just 2% who thinks that is likely. Fully 45% of respondents – remember this is a global survey from a huge investment bank – voted for the status quo of a EURUSD between 1.18/1.20.

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The Brexit talks have GBP at risk. Of course, a resolution would see the bulls return and one would hope that a deal can be done. But the reality is the Democratic Unionist Party (DUP) sounds to have an entrenched position and so too does the Irish government. So, the chance of slippage into 2018 for a deal seems high. As a result, GBPUSD could retest the recent uptrend at 1.3320 and if that breaks I’d be looking for a 200-point fall.

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