Commodity currency traders, including the AUDUSD, are closely watching upcoming Chinese data points amid an upward bias in fundamental indicators. As the world’s largest commodity buyer, China’s dual-track economic outlook keeps traders on their toes, given the uncertainty about which direction the trend will go.
The huge surge in China’s imports this year has caught many analysts by surprise, who were expecting subdued trade due to rising barriers from the EU and the US. China’s aggressive pivot towards Belt and Road Initiative (BRI) partners has helped offset a lot of the impact. But the restrictions themselves have helped propel China’s commodity buying, as many industries stock up on materials that might be affected by future trade friction. That includes stockpiling crude oil (before the war in the Middle East) and iron ore.
Commodity Currencies “Diversify”, Aussie Gains
The result of the shift in China’s buying patterns has left commodity currencies moving out of synch. The CAD benefits from high crude prices, while the AUD gets support from raw material buying such as iron ore, copper and coal. But the weak domestic market in China means that consumer-oriented commodity exporters like New Zealand have suffered. Without the NZD’s balancing influence, the AUD appears more attractive to foreign investors, giving it an additional push.
The RBA’s aggressive rate hikes to counter rising housing costs have further supported the Australian dollar. Markets are now fully pricing in a rate hike later in the year after stronger-than-expected GDP growth. Further upside in AUDUSD has been constrained by a resurgence in the greenback following better-than-expected US jobs data. The next potential catalyst for the currency pair is a trove of important China data, including the much-anticipated trade figures.
What the Market is Looking For
Early on Tuesday, China’s August trade balance will be released, which is expected to show another whopping surplus of $120 billion, up from $112.5 billion in July. Economists anticipate exports will accelerate faster than imports. Last month, imports increased 27.5% from a year earlier, while exports grew at 23.9%.
The strong growth is expected to be driven by further front-loading of demand ahead of the highly anticipated second meeting between US President Donald Trump and China’s President Xi Jinping later in the month. In other words, the growth rates are understood to be extraordinary and could reverse depending on how trade talks proceed.
What Happened to Stimulus?
Another factor that has surprised traders more than economists is China’s pivot away from large-scale stimulus spending, which in the past helped prop up domestic demand and, by extension, commodity currencies. Such spending, however, would have inflationary pressures, so Aussie traders also look closely at that indicator.
China’s August inflation is expected to rise to 0.9% from 0.5% previously, suggesting an expansion in the monetary base. This might limit the central government’s potential to stimulate, as it has been relying more on targeted measures. A miss in the China inflation figure could also be positive for the AUDUSD.
