The Australian Dollar Is Standing By for Lift-off after Clearing Major Level on Charts

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– AUD overcomes downtrend, erases 2019 loss Vs USD.

– And now has its eyes on the 0.72 level, says Saxo Bank.

– As global environment turns positive in wake of jobs data.

– U.S.-China deal and weak USD offer support to the AUD.

– GBP/AUD’s nascent uptrend intact but to be tested ahead.

The Australian Dollar could see further gains in the weeks ahead after having overcome its 2019 downtrend on the charts and all-but erased this year’s loss against the U.S. Dollar, although the antipodean unit is still meeting stiff resistance from Pound Sterling. 

Australia’s Dollar has risen 1.3% against the U.S. Dollar this last week and by 3.67% in December, which has whittled its 2019 loss down to just -0.59% ahead of year-end, although the Pound-to-Australian-Dollar rate has gained 0.48% in the last week and is still up 3.7% for the year. 

The Aussie has benefitted in recent weeks not only from a strong November jobs report that was seen lessening the probability of a February rate cut from the Reserve Bank of Australia (RBA), but also an improvement in the global backdrop and a broad decline in the U.S. Dollar. 

Vice Premier Lui He will travel to Washington this Saturday to sign the ‘phase one deal’ agreed between China and the U.S. in October, according to multiple reports attributed to The South China Morning Post. Those reports follow comments from White House trade adviser Peter Navarro on Monday that suggested Washington expects the pact to be signed in the next week, which would be a major win for the global economy and Australian Dollar. 

“The Australian dollar is the best performing G10 currency overnight. This is on the back of the somewhat more positive official China manufacturing data this morning and optimism surrounding the signing of the US-China Phase One trade deal,” says Lee Hardman, a currency analyst at MUFG.  “While this has thoroughly been priced in at this stage, the official news may still provide a slight further boost to sentiment which will support AUD and NZD.”

Above: AUD/USD rate shown at daily intervals. 

The Aussie is sensitive to changes in commodity prices as well as the Chinese economy and currency because Australia does a large industrial commodity trade with the world’s second largest economy. With a weak domestic economy, RBA interest rate cuts and Federal Reserve (Fed) hikes aside, that explains why the Aussie has fallen so sharply since the end of the first quarter 2018 when the tariff fight first got going. 

President Donald Trump first announed the ‘phase one deal’ on October 11, which arrested a renewed decline in the AUD/USD rate and ultimately paved the way for the final quarter’s nascent gains. The pact has already averted another volley of U.S. tariffs that were due to hit Chinese exports and the global economy in December although it’s also expected to see some earlier punitive levies rolled back too. 

“The Australian dollar is celebrating Fed liquidity provision into year-end, hopes for a Chinese growth revival on further stimulus and easing (as well as the USDCNY back below 7.00), not to mention hopes that the US-China trade deal will further boost the outlook. [AUD/USD] has now thoroughly broken out of the former descending channel that dominated action since 2018,” says John Hardy, head of FX strategy at Saxo Bank. “0.7000 looks like a psychological key as 2020 gets under way and the next objective looks like perhaps 0.7225-0.7250 if the good cheer spills over into the New Year.” 

Above: Pound-to-Australian-Dollar rate shown at daily intervals. 

Final quarter gains have seen the Aussie overcome its 2019 downtrend on the charts, opening the door to a further upward move toward 0.72 and above for the AUD/USD rate in the coming weeks. However, the Aussie is still meeting resistance from a resilient Pound Sterling, which has managed to keep its post-summer uptrend intact, although appetite for the British currency will be tested in the New Year by the next stage of the Brexit negotiations. 

Prime Minister Boris Johnson has, after all, used the Withdrawal Agreeement Bill to create a new ‘no deal’ Brexit ‘cliff edge’ ahead of trade talks with the EU that are expected to begin in February. The UK is on course to exit the EU on paper at the end of January when it will enter a standstill ‘transition period’. The PM will have until the end of June to decide whether to abandon his pledge not to extend that period beyond the end of 2020. 

European Commission chief Ursula Von der Leyen told French and German press this week that an extension is likely to be necessary, and agreement would be required around mid-year. If that’s the EU’s opening gambit in the negotiations over the furture relationship then markets might soon fret about a renewed prospect of a ‘no deal’ Brexit at the end of 2020. 

“We have been surprised by how quick the markets have been to readily assume that a sizeable majority would allow the Prime Minister to soften the edges of his Brexit plans. If anything, since the election, the PM has been keen to emphasise that the commitment to leave the transition phase by end-2020 is a manifesto pledge that he intends to adhere to,” says Kamal Sharma, a strategist at BofA Global Research. “We are sceptical that GBP is as undervalued as many observers believe.”

 

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