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- AUD continues advance as markets cheer "trade war" progress.

- November retail sales helps support appetite, but how long for?

- HSBC says to sell AUD ahead of January's Reserve Bank meeting.

The Australian Dollar continued to trade on its front foot Friday as optimism about trade talks between the U.S. and China helped lift markets and as investors responded to a strong set of retail sales numbers for November.

Chinese officials said Thursday that talks have laid "the foundation for resolving issues" around international trade over the coming weeks, delivering a boost to investor risk appetite at a time when markets were on edge over the so-called trade war between the world's two largest economies.

Negotiators from both sides are expected to remain in contact over the coming weeks, although a deal to end the trade war is needed before March 01 to avert an automatic increase in the 10% tariff charged on $250 billion of goods exported to the U.S. each year.

"US-China trade talks appear to be heading towards a constructive, risk-positive result. USDCNH is at its lowest level since August as China has pursued additional monetary and fiscal stimulus, lowering the CNH risk premium. China proxy trades (like EURUSD and AUDUSD) should benefit," says Hans Redeker, head of FX strategy at Morgan Stanley.

The tariff fight between the two has hurt the Australian Dollar because it is underwritten by a huge commodity trade with China and the rest of the world, which has led the unit to develop a close correlation with commodities and China's Renmbimbi.

China's economy and currency were dented in 2018 by the trade war, accounting for much of the earlier fall in the Aussie, and now the Renmimbi is rebounding other currencies like the Aussie have also been able to recover.

"AU retail sales were marginally stronger than expected; the ex food picture was even better. The caveat is that it could represent some pulling forward of Christmas-time consumption," says Elsa Lignos, head of FX strategy at RBC Capital Markets.

Retail sales data for November provided an additional tailwind to the Aussie on Friday. Spending was 0.4% higher during the penultimate month of 2018 when markets had looked for it to rise at an unchanged pace of 0.3%.

Sales growth was above the 12-month average of 0.3% but there are reasons for why the market response to the data may have been found wanting, including the presence of Black Friday in November.

There is precedent for consumers to pull Christmas spending forward into November to take advantage of discounted prices on Black Friday, which has boosted November's sales in recent years only for spending to then underwhelm in December and subsequent months.

"Credit card data suggests the overall Christmas trading period was relatively soft. The run up in sales activity in the 2018 pre-Christmas trading period lagged behind 2017," says Michael Blythe, an economist at Commonwealth Bank of Australia. "Cumulative dollar value of the Christmas spend from start November to early January is the best approximation of the underlying trend. On that metric, spending was down -3.47%."

Above: AUD/USD rate shown at daily intervals.

The AUD/USD rate was quoted 0.40% higher at 0.7215 Thursday and has now risen 2.3% so far in 2019, while the Pound-to-Australian-Dollar rate was -0.52% lower at 1.7645 and has fallen -2.44% this year.

Above: Pound-to-Aussie rate shown at daily intervals.

Markets care about retail sales as they are a leading indicator of economic growth and because rising and falling consumption can influence inflation. It is inflation that central banks are attempting to manipulate when they tinker with interest rates.

The Reserve Bank of Australia (RBA) has held its interest rate at a record low of 1.5% for more than two years now, citing below target inflation and a growth outlook that means inflation willtake some time to rise above the 2% threshold.

Without increased retail spending to drive faster economic growth and higher inflation, the RBA will not be able to raise its interest rate so their continued absence is negative for the Aussie Dollar outlook.

However, the property market is now creaking and posing a threat to the economy given the impact price declines could have household confidence and spending. House prices fell, on average, in eight of Australia's largest cities during each of the first three quarters last year.

"A soft inflation reading for Q4 would keep it entrenched below target. If the RBA meeting offers any suggestion that the central bank is less confident the next move in rates is more likely to be up, the AUD would likely crack lower," says Tom Nash, a currency strategist HSBC in Australia. "We reflect our USD long position by recommending to sell AUD-USD."

HSBC has a bullish and contrarian outlook for the U.S. Dollar and remains bearish on the Aussie. Nash says the market has been too aggressive in betting against the Federal Reserve (Fed) and that it will likely get burned.

However, at the same time, Nash and the HSBC team are saying the market may have been too kind to the Aussie currency during recent weeks and that it will soon see fresh losses. The housing market, economy and what weakness in both might mean for the RBA are chief among the reasons for why.

Australian GDP growth came in at just 0.3% for the third-quarter, which took the annualised pace of expansion down from 3.1% previously, to 2.8% in the recent quarter when markets had looked for the economy to grow 3.3% relative to the same period one year ago.

"Any sign that the RBA optimism is starting to be tested, particularly relating to the oft-repeated statement that the ‘next move is more likely to be up’, would likely open up a move in AUD-USD below 0.70, a level it has spent little time beneath," Nash writes, in a recent note to clients.

Nash and the HSBC team have told clients to bet on a decline in the AUD/USD rate to 0.6910.

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