AUDUSD risks further falls

A mostly subdued session to end the month, although there were two main talking points coming from yesterday’s session. The first was the collapse of President Trumps talks with North Korean President Kim Jong-un which saw the South Korean stock market, the KOSPI finish the day -1.72% lower and resulted in USDKRW rallying back above 1122.

While the collapsed talks have dented hopes for an immediate declaration to officially end the 1950’s Korean War, the overall tone emanating from the summit appear positive. Unless the North Korean leader elects to return home and resume his missile testing/nuclear weapons program, the market is unlikely to dwell much further on the immediate implications of the failed talks.

The second event and one that is likely to have a more lasting impact for markets was the stronger than expected U.S. GDP and core PCE data released overnight. Real GDP rose by +2.6% in Q4 2018 and despite this being a notable deceleration from the +3.4% growth in Q3, it beat the consensus estimate of +2.2% by a wide margin. Surprisingly, private domestic final sales and business investment both accelerated relative to Q3, and this has raised hopes that the 2019 growth slowdown is less severe than feared.

After trading in a tight range for the past fortnight, the stronger data helped U.S. 10-year yields close 4bp higher at 2.72%. Perhaps due to the upward pressure on interest rates, U.S. equities finished the day lower, a reaction that supports our view that U.S. equity markets are taking a “breather”, before refocussing on the 2815/25 resistance area.

In the FX space, the U.S dollar rallied, in a move that saw the AUDUSD fall back below .7100c. As noted in a recent article, it has been a real tug of war for the AUDUSD in recent weeks. The positivity surrounding the prospects of a U.S. - China trade deal has been offset by the patchy outlook for the Australian economy.

With the better than expected U.S. GDP data still fresh in trader’s minds, next week sees the release of Australian Q4 GDP data and an opportunity for traders to gauge how the Australian economy is fairing relative to the U.S. economy.

The partial components of the Australian GDP data released thus far, indicate that the Q4 GDP number will fall short of the +0.6% number forecast by the RBA, with softer retail sales, trade, and construction work likely to weigh. Potentially providing some offset, state governments continue to invest in infrastructure projects and the Capex survey released this week suggests private firm’s investment spending plans are on the rise.

If Australian Q4 GDP next week does not print at least 0.3% or higher the risk is for the AUDUSD to fall through the trendline support currently at .7075 and then below the .7050/40 support zone. This would re-establish the downtrend and in doing so enable the AUDUSD to trade back into the high 60’s as the contrast and between the U.S. and Australia economy sharpens.

Source Tradingview. The figures stated are as of the 1^st of March 2019. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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