Australian Dollar Outperforms Sterling and US Dollar, Key Chinese Data Dominates Outlook

The Aussie dollar powered to a seven-week high on the view that interest rate differentials would work in its favour for a while longer.

Both the US dollar and pound sterling have suffered against the Australian dollar on the observation that the Bank of England and US Federal Reserve will likely delay raising interest rates until 2016.

"The longer it takes the Fed to raise rates, the longer it could take Britain. That notion caused gains for the pound to lag rivals like the euro, Aussie and loonie, mustering little more than a two-week peak," says Joe Manimbo, market analyst at Western Union.

Positive traction for the pound was also restrained by news of a bigger than expected U.K. trade deficit of £11.1 billion in August, news that reinforced expectations of slower British growth last quarter.

"It also helped that most global stocks soared, whetting market appetite for high-yielders like the Aussie, the developed world’s second-juiciest base rate at 2.0%. Gains for commodity currencies may have limited upside with China not out of the woods while festering global uncertainty also doesn’t bode well for sustainable gains beyond the near term," says Joe Manimbo, currency analyst at Western Union.

Elsewhere in the commodity dollar complex, the Canadian dollar could struggle to hang on to late July highs, following mixed news on Canadian hiring. Canada netted 12,100 jobs in September, topping forecasts.

Unemployment rose by a tick to 7.1%, a February 2014 high, as more peopled entered the workforce.

"The market won’t like how all of the job creation came from part-time hires. The report leaves the loonie’s gains ripe for profittaking heading into the long holiday weeken," says Manimbo.

"USDCAD touched the 1.2900 mark, which is effectively the post-July BoC level but is now trading broadly in line with our fair value estimate of 1.2870. USDCAD should hold at these levels but a break below the figure would be a significant psychological barrier that would open downside potential to 1.2780/1.2800," says a currency brief from TD Securities in Toronto.

At these levels initiating USDCAD longs look more attractive from a medium-term perspective suggest TD Securities.

"But as we noted here yesterday, USDCAD may become a more benign currency pair with much of the positioning washout having occurred already and now sitting closer to neutral. Indeed, in this morning’s USD selloff, the CAD is lagging the other commodity-linked currencies in outperformance," say TD.

Key Event Dominating the Outlook

The evolution of the Chinese slowdown story remains central to the Australian dollar and commodity dollars.

China September Trade is due for release on the 13 Oct:

August was a shocking trade month in China, with imports down 7.1% m/m (sa) in the month.

A rebound in September is likely, after a few one-offs dampened August, so we look for exports growth to ease to -4.1% y/y and imports to be also trimmed to -12.4% y/y, more optimistic than consensus.

Note that Chinese trade data will soon only be released in CNY terms, leaving forecasts with a bit more than the usual degree of uncertainty.