Faster-than-expected Chinese GDP growth would lift commodity prices and boost the Dollar in the short term but bank forecasts show a double-digit loss could be in store for the AUD in 2018.

The Australian Dollar was boosted during early trading in London Monday as markets positioned for the release of China’s fourth quarter GDP number later in the week.

Strategists say the Aussie currency can forge ahead against many of its international rivals this week if recent bullish signals are right and the Chinese data comes in better than economists currently expect.

“Encouraging Chinese economic activity and favourable Australian December employment conditions will underpin a firmer AUD against most major currencies,” says Elias Haddad, a senior currency strategist at Commonwealth Bank of Australia.

Leading indicators suggest to CBA that China’s economy will grow at an annual pace of 6.9% in Q4 2017 (consensus: 6.7%) driven by consumption and investment spending.

"This will support commodity prices and Australia’s terms of trade," says Haddad.

Commodities like iron ore, a key component of steel, are Australia’s largest exports and so changes in their prices can influence expectations for the Australian economy.

Chinese GDP data will be released on Thursday at 02:00 am London time and will set the narrative around commodity prices for the foreseeable future. Consensus suggests quarterly growth of 6.7%, down from 6.8% in the previous period.

Australia’s Dollar notched up gains over the bulk of the G10 basket Monday, ceding ground only to the Euro and the British Pound, as traders bet on a faster pace of growth in China.

The Australian Dollar was quoted 0.75% higher at 0.7964 against a beleaguered US Dollar Monday, which has been kicked to the curb by traders in response to a series of bearish developments.

Above: AUD/USD rate shown at weekly intervals.

The Pound-to-Australian-Dollar rate edged lower to trade at 1.7337 on Monday, the losses are however small when contrasted to the gains witnessed on Friday, January 12 after Sterling found support on renewed optimism over the path of Brexit negotiations.

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

Reports Friday suggested that European capitals are open to the idea of a softer Brexit while lawmakers in the European parliament are reportedly considering dialling down efforts to force London’s clearing houses to decamp into the Eurozone.

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Australian Dollar to Drop Rankings in 2018 say NAB, JP Morgan

While the week has started off on a positive note for the Aussie, we are told by a major Australian lender that the year ahead won't be an easy one for the currency.

Alan Oster, chief economist at National Australia Bank, forecasts that, in many ways, 2018 will be a continuation of the last year in that Australian economic growth is likely to remain driven by business and government investment as households continue to retrench.

“Underlying inflation is forecast to pick up slowly to 2% by end-18, which together with early evidence of some pickup in wages growth should be enough to see the RBA commence tightening in the second half - we have 25bp hikes in August and November pencilled in. This would take the cash rate up to 2%, a level which is still considered stimulatory,” the economist writes, in a recent briefing.

Australia’s Dollar ranked in the middle of the G10 performance table for 2017 after lagging European currencies such as the Euro, Sterling and Swedish Krone throughout much of the year.

Central banks have been key to performance in currency markets more so than before over recent months, which has seen the Australian Dollar sidelined.

The European Central Bank, the Riksbank, Bank of England and also, the Federal Reserve and the Bank of Canada, are all in the process of making policy changes that will benefit their currencies.

“Key developments to watch include: the transmission from employment to wages amidst forces such as globalisation and digital disruption; momentum in house prices and credit growth and how that impacts on monetary policy and/or macro-prudential policies,” Oster says.

However, the Reserve Bank of Australia stood pat throughout 2017, keeping the cash rate at 1.5%, as weak wage growth and caution among households left the economy growing at a moribund pace and undermined inflation.

Whether this changes in 2018 will be key to the outlook for the Aussie Dollar. Oster forecasts that the AUD/USD rate will decline gradually over the course of 2018, taking it down to 0.7200 by the end of December, which could have implications for the currency’s strength relative to other international rivals.

Economists and strategists at J.P. Morgan appear to agree.

“In 2018, we expect AUD’s ranking within the G10 to slip a few places; we are forecasting a steady decline towards USD0.72 by year end,” says Sally Auld, chief Australian and NZ economist and head of foreign exchange strategy for the region at JP Morgan.

Oster and Auld’s forecasts imply a near double-digit loss for the Aussie currency relative to the US Dollar in 2018. Key to the loss will be widening gap between US bond yields and Australian bond yields, one that is seen favouring the US Dollar.

“Our US economists are now forecasting four hikes from the Fed in 2018 and we continue to expect the RBA to remain on hold in the year ahead. This means that a negative policy rate spread between Australia and the US looks almost certain in 2018,” Auld writes, in a recent briefing.

“While rate differentials have seemingly lost some of their pull on currencies of late, we still think that this development should have some influence on the path of AUD/USD in 2018.”

Readers can learn more about what other strategists say is in store for the Australian Dollar during 2018 from; Compilation of Major Bank Forecasts, Currency Views for 2018.

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