The Australian Dollar may be due for a significant rebound as short interest peaks against a backdrop of stabilization in Chinese economic news flow.

Talking Points

Australian Dollar Shrugs Off Soft Jobs Data, Rallies on Chinese Trade Figures
Peaking Short Interest, Stabilizing Chinese News Flow May Spark Aussie Rebound

The Australian Dollar outperformed in otherwise uneventful overnight trade. The currency shrugged off a disappointing set of Employment figures that showed the economy shed 10,200 jobs in July, yielding the worst result in four months. Economists were expecting a 5,000 increase ahead of the announcement. A knee-jerk initial reaction brought the currency lower but losses were promptly erased.

Interestingly, details of the report were not much more encouraging than the soft headline figure. Full-time and part-time hiring both declined and a slight drop in the unemployment rate seems to have owed to a drop in the participation rate rather than a robust labor market. Furthermore, June’s figures were revised broadly lower.

As we discussed in our weekly forecast, such counter-intuitive performance seems to reflect a deceleration in capital flows feeding the Aussie-short trade. Put simply, those market participants that intended to be short at current levels are already there, meaning the down trend is running dry on fuel needed to perpetuate itself. Indeed, while the latest COT data set shows net speculative shorts hit another record high, the week-on-week growth rate of anti-AUD exposure has dramatically declined.

Furthermore, the breakdown in the Aussie over recent months has closely tracked the deterioration in the relative monetary policy outlook, which in turn appears to have emerged as the markets aggressively slashed their outlook for Chinese economic growth. With this in mind, it’s noteworthy that Chinese economic news-flow appears to be stabilizing relative to expectations. If this helps halt the slide in Chinese growth bets, it may likewise scatter near-term RBA rate cut bets and set the stage for an Aussie recovery.

Indeed, having undone the initial downward spike after the jobs report, the Australian unit proceeded to rally as China released an impressively strong set of trade figures. Imports rose by 10.9 percent, marking the largest year-on-year increase in three months and hinting demand from Australia’s top trading partner may be far more resilient than expected (economists were penciling in a mere 1 percent increase ahead of the release). Prices are now probing above near-term chart resistance and threatening to open the door for a larger push upward.

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