Above: RBA Governor Lowe. Image © Crawford Forum, Reproduced Under CC Licensing

- AUD rises alongside Chinese Renmimbi and investor risk appetite.

- Aided by decline in AU current account deficit, rising trade surplus.

- But tariff truce seen unlikely to hold, 'trade war' still a threat to AUD.

The Australian Dollar's multi-week rally extended Tuesday as risk appetites continued to improve and after official data revealed a notable fall in the Aussie current account deficit during recent months.

The current account deficit fell to -$10.7 billion during the third-quarter, down from $-12.1 billion previously, although markets had looked for $-10.2 billion.

The data is good news even in the face of disappointment over the third-quarter number because previously it was thought the deficit had reached -$13.5 billion during the second quarter.

However, the second quarter number was revised lower by $1.4 billion Tuesday, more than compensating for the minor disappointment over the latest period.

"The current account deficit narrowed to $10.7 billion in Q3 because of a widening trade surplus. The trade balance posted a solid surplus of $6.6 billion. Exports rose by 0.1% in Q3 while imports fell by 1.5%," says Joseph Capurso, a currency strategist at Commonwealth Bank of Australia.

Above: Trade balances. Source: Australian Bureau of Statistics.

The current account measures changes in the amount of money flowing into and out of Australia as well as movements in borrowing from the rest of the world.

Markets care about the data because it paints a telling picture of demand for a currency while providing insight into the extent to which a nation is exposed to changes in the sentiments of international lenders.

The Pound-to-Australian-Dollar rate was quoted at 1.7342 on the interbank market Tuesday after having recovered from a low of 1.7214 in the previous session. But High Street lenders are offering only between 1.6730 and 1.6852 for international payments and transfers at the same time.

Specialist providers are offering better rates than that, with quotes spanning the 1.7180 to 17216 bracket Tuesday.

Tuesday's data comes just hours before the Australian Bureau of Statistics publishes its estimate of GDP growth during the recent quarter. The data is a positive omen for the economic growth because trade surpluses, whether gained through rising exports or falling imports, add to GDP.

"Domestic developments are likely to remain less important for driving the performance of the Australian dollar," says Lee Hardman, a currency analyst at Japanese banking giant MUFG. "RBA policy is in state of deep freeze with the policy rate having been on hold for 28 months."

Above: G7 economy interest rates. Source: Commonwealth Bank of Australia.

The Reserve Bank of Australia (RBA) flagged Tuesday a "tightening" of housing market credit conditions for some borrowers, as well as a deceleration of prices and transactions in some key cities as risks to the economy.

However, it also noted encouraging developments around unemployment and wage growth, albeit that those were not enough to warrant higher interest rates.

The RBA has kept its cash rate at a record low of 1.5% ever since mid-2016 due to weak inflation pressures that are being made worse by lacklustre wage growth and high household debt levels.

Markets overlooked the RBA policy update and instead maintained a bid for the Aussie in light of an improving external environment, which has seen America's Dollar continue ceding ground to other currencies.

Meanwhile China's Renmimbi, with which the Aussie is closely correlated, has remained on its front foot since Presidents of the world's two largest economies claimed to have reached an agreement at the G20 summit.

Above: AUD/USD rate (blue and red) with Dollar-Renmimbi rate (orange) overlay

The AUD/USD rate touched a three-month high during the Monday session, which has taken gains for the pair up to 2.2% for the last week alone. It's now down -5.4% for 2018.

The Pound-to-Australian-Dollar rate is now up by only 0.6% for 2018 after a notable rebound from the Aussie in recent days, which came alongside a weaker Sterling.

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

"We expect the Aussie to continue to be mainly driven by external developments in the coming months," MUFG's Hardman says. "The worst case outcome for the Aussie would be break down in US and China trade talks which leads to the imposition of further tariffs and exacerbates the slowdown in global growth."

President Donald Trump says he will delay for 90 days, an increase in the tariff rate levied on $250 billion of Chinese goods imported into U.S. each year. China is supposed to buy more U.S. agricultural goods in return and both countries are to enter talks aimed at resolving differences over trade policies.

With January 01 previously expected to see U.S. tariffs rise from 10% to 25%, the weekend “deal” averts an imminent escalation of the 'trade war' between the world’s two largest economies. But analysts are saying the deal does nothing more than delay an inevitable escalation of hostilities between the two.

"Scepticism has set in quite quickly on the US-China ‘agreement’. It also seems the White House statement on the deal was banned on Chinese social media (WeChat users unable to share the Chinese or English language version from the US embassy’s official account). Plus both Kudlow and Mnuchin struggled yesterday to confirm what exactly had been agreed," says Elsa Lignos, global head of FX strategy at RBC Capital Markets.

RBC highlighted on Monday what appear to be significant differences between U.S. and Chinese perceptions of exactly what was agreed at the weekend.

The White House emphasised in its statement that tariffs against China will still rise to 25%, after 90 days, if the two sides are unable to resolve the remaining issues between them. But China’s representatives have told local press that there will not be any tariff increases, while failing to mention the 90 day period.

The U.S. administration also says in its statement there will be an immediate discussion about China’s alleged theft of U.S. intellectual property and other “unfair” trade practices. But China has merely said it and the U.S. have agreed to work toward a consensus on trade issues.

The tariff conflict between the U.S. and China has hurt the Australian Dollar because the Antipodean currency is underwritten by a mammoth commodity trade with China. This not only places the Aussie at the mercy of mood swings in the commodity market, but also investors’ changing sentiments toward the Chinese economy.

Advertisement

Bank-beating exchange rates. Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here