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  • AUD/USD is a crucial component to the risk rally following the Sino/US cease-fire; Although the caveat is USD repatriation and higher interest rates as stocks recover and bonds fall.  
  • AUD/USD is currently trading at 0.7366, down from the session high of 0.7393 and slightly higher than the days low of 0.7348.

We are entering the last few weeks of the year which will hold some key risk events, including the RBA, nonfarm payrolls, the Fed and the Brexit Parliamentary vote. However, the immediate focus has been with world leaders gathering in Argentian over the last number of days.  

U.S. President Donald J Trump and Xi Jinping, serving as general secretary of the Communist Party of China, president of the People’s Republic of China, and chairman of the Central Military Commission, came together over a dinner on Saturday night accompanied by their negotiation teams to thrash out the conditions for a cease-fire over their trade disputes.  

The meeting was highly anticipated by the markets considering how much was at stake. The outcome was positive, and a 90-day truce will enable both sides some time to continue their negotiations, but it is a short enough period that the U.S. has granted the Chinese to create a sense of urgency from China towards meeting Washingtons requirements to reduce trade imbalances.

However, while the warm talks have been perceived as a good start by Sino and US experts, markets are starting to factor in the number of deep issues between the two countries.   Those issues are unresolved by this postponement to the year-long and destructive trade war that has sparked global market turmoil in 2018 – And that is what gives the US dollar a new investment appeal which could ultimately play back into the Aussie bear’s favour as soon as the market hysteria dies down a little.

The Christmas wrapping paper disguised the disappointment within

At first glance of the outcome of the meeting between Xi and Trump, markets rallied on the open. It was what the markets had been hoping for. US futures and Asia all rallied and EM-FX cheered. AUD   trades as a proxy to emerging markets.   With its high beta qualities, it meant that with stocks and commodities on the charge, AUD/USD opened with a robust bullish gap of 1% that extended to a fresh four-month high. At the same time, US yields have rallied, and that is U.S. dollar bullish – (Bond prices and yields have an inverse relationship  and as stocks rise, demand for bonds and the cost to buy them tend to fall).

Now we need to wait and see how the cease-fire plays out;  This is not a permanent peace treaty and, if history is anything to go by, violation of ceasefires have happened before. US / China trade agreements tend to fluctuate, and the US could still go ahead with the 25% tariff increase if both sides fail to agree on  anything new within the 90 days. Trump added that if unless China could find a way to tilt the balance of trade power more favourably towards US businesses, hostilities will resume in January – and that is where AUD/USD will come under pressure sooner than later.  

So long as U.S. data improves over the same time frames and should the Australian housing market and subdued  wage growth  continue to be a pest for the RBA, the central bank divergence will lave a bullish bias in AUD/USD.

“While the short-term outlook for the AUD has improved on the back of the hope that Chinese demand will increase on the back of the weekend’s trade truce, over the long term Australia should be wary of Trump’s trade deals,” the analysts at Rabobank concluded.  

The analysts also noted that there are a few ominous signs in the truce that was agreed over the weekend:

“The White House Statement the followed the meeting between Xi and Trump included the statement that “China will agree to purchase a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other product from the United States”. This could be a concern for Australian producers of agricultural commodities such as wheat, beef and wine and also a concern for LNG exporters.”

RBA next major risk:

Analysts at Rabobank noted that the December 4 RBA policy meeting is the next major focus for the AUD:

“Steady policy is expected but the market will be interested to see if recent strong Australia employment data has shaken policymakers out of their cautious position.  That said, with wage growth still subdued, we expect steady policy through 2019 and would look to fade rallies in AUD/USD ahead of the policy meeting.  We would expect the AUD/USD0.74 level to offer strong psychological support.  The 200-day SMA is at 0.7418.”

AUD/USD levels

However, overall,  while holding above the 073 handle and 23.6% Fibo of 2018s decline, the technical picture remains bullish as RSIs rise and the pair maintains the bid for now. On that break of 0.7338 that was the 11-week high,   a run towards the 200-D SMA and the 50% Fibo is on the cards. “We continue to target the 200-day moving average at .7419 and the July 9 high at .7484. Directly above here lies the 0.7514/18 55 and 200-week moving averages, we would allow for some profit taking here,” analysts at Commerzbank argued.