Originally published by AxiTrader
The Australian dollar did really well yesterday on the back of the combination of a nice bounce back in retail sales, partial indicators which point to a solid GDP result today, the strength of the Caixin Chinese PMI's, and a pretty upbeat outlook for the economy from RBA Governor Lowe after the RBA decided to leave rates on hold yesterday.
That saw the AUD/USD rally as high as 0.7653 before dropping back sit at 0.7610 this morning.
To me that pullback seemed inevitable when I saw the extent of the pressure copper came under in Shanghai futures trade yesterday. It was down 3.3% before US futures then added to the losses dropping 4.41% to finish the day at $2.928 a pound.
Copper is important Aussie dollar traders because for many it represents a bet on and the outlook for global growth.
That's not what drove copper lower last night though as I have explained in my Markets Musing this morning. You can read it here.
But I do use the 10-minute charts of Shanghai copper and the AUD/USD price as a short-term directional indicator for the Aussie dollar. Which is why I say in the headline it is hard for the Australian dollar to sustain a rally when copper falls 4.4%.
That makes today's release of Q3 GDP even more important for the Aussie and forex traders.
The market is expecting a print of 0.7%/0.8% which would deliver a year on year outcome of 3% to 3.1% for Australia. That's a solid result and reinforces the RBA's outlook for the economy. And that is an outlook which suggests the next move in rates for Australia is higher.
But that outcome for GDP is also pretty much baked into prices here at the moment and one of the reasons AUD/USD hasn't fallen further as the relationship with copper would suggest.
So the Aussie is at risk, after such a heavy reversal from the 0.7653 high, of a big fall if GDP were to print weaker than expected. Of course, a 0.9% or 1%+ number would see the strength return once again.
As I written recently it is up to the data to disabuse the naysayers and hand-wringers on Australia's economic outlook and thus the path of RBA rates.
Yesterday's data was enough to lift the Citibank economic surprise index from -22.8 to -16.5. But it's still in negative territory meaning data has still been printing worse than expected on balance.
If this Aussie dollar rally is to prove anything more than an ephemeral move within an overall deep and long lasting downtrend Australian data needs to continue to print in line with where the RBA says the economy is, and is heading.
Turning to the charts now and my system continues to point higher. But after that big pin bar reversal there is every chance that like copper and the Canadian dollar before it the Aussie has a bit of a reversal before it moves in line with where the system is pointing.
That makes 0.7665 again an important level for the Aussie. A fall through there suggests 0.7550 and of course, the recent low at 0.7530 would need to hold.
Topside its last nights high at 0.7653, the 23.6% retracement level at 0.7666 and then 0.7749 which is the 38.2% level and my current target.
Have a great day's trading.