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The Australian dollar ended 2016 on the back foot, but managed to recover thanks to good Chinese data. What’s next?

Here is their view, courtesy of eFXnews:

The consensus trade for 2017, long USD, remains on the ropes and is being driven mainly by positioning.  Indeed, we think the FOMC Minutes contained few negatives for the USD. Instead, the big move in USD/CNH is driving some clearing of long USD positions, which are spilling over into the G10 FX. Our China economist puts the move in USD/CNH down to several factors. First, another lower fixing today in USD/CNY continues to belie expectations of a repeat in 2017 of the Renminbi’s weak start in 2016, which is leading to a clearing out of significant long USD/CNH positions. Second, there is market talk of further FX policy restrictions such as asking SoEs to convert FX current account receipts into RMB. This highlights the degree to which Beijing is supporting the currency and trying to change the demand-supply balance. Third, continued very tight offshore liquidity has made holding short CNH positions unprofitable.

Profit taken in short AUD/USD position.

The stronger CNH and better than expected China PMI data have also helped pushed the AUD/USD back higher and to a stop at 0.7320.  So we have exited the trade for a 1.8% profit (entry level 0.7451).*

We continue to think that being short commodity currencies vs the USD, especially the AUD, is a good way to express both a more aggressive FOMC and concerns about US protectionism and  will look to get back long the USD, but would like to see a further clear out of positioning first.

Tomorrow sees the release of Australian trade balance data for November, where stronger commodity prices and the continued recovery in mining export volumes post supply interruptions should lead to a significant decline in the trade deficit (consensus -AUD0.550bn, previous -AUD1.541bn). These data should boost hopes for a rebound in growth in Q4 from the -0.5% QoQ contraction in Q3. It usually takes a large miss by economists to lead the AUD to react to these data.

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