Aussie Rallies On Improvement In Risk Appetite

Aussie Rallies On Improvement In Risk Appetite
January 8, 2019

The Australian Dollar showed a hike on Monday with a surprise injection of stimulus into the Chinese economy. Additionally, Donald Trump’s positive statement regarding the US-China trade talks also turned the sentiment bullish towards the antipodean currencies. From a low of 0.7054, the AUDUSD pair rallied to reach 0.7125 levels. Analysts at Morgan Stanley, Bank of America, Merrill Lynch, and Commonwealth Bank of Australia have recommended a long position in the Australian dollar.

 

Aussie rises on improvement in risk appetite

The People’s Bank of China (PBOC) announced a cut in the cash reserve ratio (amount to be held as reserves by banks) by 100 basis points (bps), or 1%, a move, which could result in the release of 1.5 trillion yuan (US$210 billion) into the banking system. The decision was made to halt the economic downturn in the country.

The reduction in the required reserve ratio (RRR) will be implemented in two stages. China’s central bank has directed the domestic banks to bring down the RRR by 0.5% on January the 15th. Another reduction of similar magnitude is advised to be implemented on January the 25th. The increase in liquidity will be used to lend to private firms and small enterprises. Presently, the reserve requirement ratio (RRR) is pegged at 14.5% for large banks and 12.5% for smaller banks.

Beijing hopes to revive its growth by increasing investment on infrastructures such as roadways, railways, and airports. PBOC invested 42.9 billion yuan in December through pledged supplementary lending to the China Development Bank, the Agricultural Development Bank of China, and the Export-Import Bank of China.

An increase in construction activities will lead to a rise in demand for steel, leading to a considerable increase in the import of iron ore. Australia, which is the largest supplier of iron ore to China, is expected to benefit with this move. As a result, traders are buying the Australian dollar. Following a cut in RRR, iron prices rallied yesterday. The cost of 62% of fines increased to $73.51 per ton, reflecting a gain of 14.4% since November 2018.

In the meanwhile, the US President issued an optimistic statement about trade talks, primarily because he believes the slowing economy will encourage the Asian nation to negotiate and arrive at a deal.

At the White House, Trump told reporters “I think China wants to get it resolved. Their economy’s not doing well. I think that gives them a great incentive to negotiate.”

“The China talks are going very well,” Trump added.

The formal talks, which began in Beijing this week, face a March 1st deadline which is keeping Forex and other financial markets on edge. Last month, trade Representative, Robert Lighthizer, said there is no plan to change the hard deadline and recently announced tariffs would be implemented if the talks don’t result in an agreement by then.

The positive statement by Trump and the cash reserve reduction in China has encouraged analysts at both Morgan Stanley and Bank of America Merrill Lynch to advise their customers to purchase the Aussie. Furthermore, the Commonwealth Bank of Australia has also issued a bullish outlook for the Aussie.

Commenting on the reduction in RRR, Hans Redeker, head of FX strategy at Morgan Stanley, said: “Optimism around US-China trade talks, the PBoC cutting RRR by 1% to support the Chinese economy and better-than-expected China services PMI should allow ‘China proxy’ and commodity FX like AUD and CAD to rebound tactically. This is especially as short positioning in these two currencies is the largest within G10. We like to buy AUD & CAD vs. USD at market.”

Therefore, fundamentals favor further uptrend of the AUD/USD pair.

Technically, the currency pair is moving along an ascending channel as shown in the image below. Additionally, the money flow indicator is rising with a reading above 50. Therefore, we are anticipating the AUD/USD pair to remain bullish in the short-term.

aud - technical analysis - 8th January 2019

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.

Janine

Janine

Janine is our editor for related stock market news. Andrew and Janine will be focusing on providing the latest trends and where the next hit could be


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