AUD, China Analysis

• Minutes to suggest the RBA requires greater conviction around inflation
• AUD/USD builds on recent recovery – stern resistance in sight
• Chinese markets reopen higher – no changes to medium-term lending rates
• The analysis in this article makes use of chart patterns and key support and resistance levels. For more information visit our comprehensive education library

Minutes to Suggest the RBA Requires Greater Conviction on Inflation

Minutes relating to the Reserve Bank of Australia’s February 6th meeting will be released in the early hours of Tuesday morning and will likely acknowledge broad progress on the inflation front. The RBA statement revealed a more balanced picture in terms of the risks to the inflation outlook now that the general level of prices has moderated but expect a line or two in the minutes pointing to the concerning level of inflation despite recent progress.

The last time the RBA hiked rates is still fresh in the memory after a spate of rising inflation in Q3 prompted RBA officials to raise the policy rate by 25 basis points (bps). Price pressures in Australia have not declined in a more linear fashion as observed in other developed economies, keeping the RBA on their toes.

Australia Monthly (Inflation) Indicator

Source: Tradingeconomics, prepared by Richard Snow

Demand still outstrips supply but higher interest rates are expected to guide this dynamic towards equilibrium and a fall in goods inflation is likely to continue to weigh on the overall CPI figure.

The latest forecast from the Bank sees no change in the policy rate until the second half of the year where policy setters have factored in two 25 bps cuts while not ruling out the possibility of further rate hikes. Expect the minutes to show a need for greater conviction in the downward path of inflation and some easing in the labour market toward the more sustainable long run average.

AUD/USD Builds on Recent Recovery – Stern Resistance in Sight

The Australian dollar has attempted to halt the longer-term decline that ensued at the end of 2023, on track for a fourth consecutive daily gain. The Aussie dollar appears to be benefitting from an improvement in China after recent supportive measures has helped revers the sharp declines in equities.

After more then a week of holidays around the Lunar Ney Year, Chinese equity markets opened up in the green and held onto those gains into the end of the day. Sizeable state-linked investment houses have been propping up equity markets with large stock and ETF purchases – which has reversed the selloff so far.

AUD/USD has turned higher since testing support at 0.6460, now approaching a zone of resistance comprised of the 200-day simple moving average (SMA) and the 0.6580 level from April 2020. 0.6580 has also been a prominent level throughout Q2 and Q3 of 2023, acting as support on multiple occasions. Shorter-term bullish momentum is likely to be tested this week with few AUD drivers outside of the Chinese effect .

AUD/USD Daily Chart

Source: TradingView, prepared by Richard Snow

Chinese Markets Reopen Higher – No Changes to Benchmark lending Rates

Chinese authorities left the 1-year medium term lending facility unchanged at 2.5% as financial support has take on more of a direct approach judging by recent measures. The focus now shifts to the 5 and 1 year loan prime rates which are both expected to ease slightly.

The SSE Composite Index has achieved four straight days of advances, although there has been a considerable time between today’s green candle and the previous one due to the - extended holiday.

Chinese equities sold off at the end of last year as pessimism around the Chinese economy gained traction. The negative sentiment accelerated at the end of January with the liquidation order of a major property developer, Evergrande, sending the index to levels not seen since the Covid lows.

The recent bounce is set for its first test at the October low of 2910 – a level that bulls failed to breach last time around.

SSE Composite Index Daily Chart

Source: TradingView, prepared by Richard Snow

https://www.dailyfx.com/news/aud-usd-outlook-aud-lifted-as-chinese-trade-resumes-rba-minutes-next-20240219.html