Australian Dollar Tumbles in Choppy Trade as China Bans Coal Imports

Summary: The Australian Dollar saw a sharp reversal in choppy trade, tumbling 1.25% to 0.7083 (0.7168 yesterday) and finish as worst performer among the Majors. A stellar Australian Employment Gain of 39,100 Jobs (vs forecast gain of 15,100) coupled with a seven-year low 5% Jobless rate initially boosted the Oz to 0.7207. The job gains were in Full-time Employment and the strongest in nearly 2 years. First-up Westpac economist Bill Evans (a perennial Aussie bear) forecast that the RBA could cut rates twice this year. The big hit came from reports that China’s Dalian port would ban all Australian Coal imports. AUD/USD tumbled to 0.70703 lows before settling at 0.7083. The Kiwi also slumped 0.8% to 0.6805.
The US Dollar managed modest gains despite weaker-than-expected Durable Goods Orders, Existing Home Sales and Philly Fed Manufacturing Index. The Euro finished modestly lower in light trade. Euro area Composite PMI’s were mostly up, primarily driven by the Services sector. The Dollar Index (USD/DXY) was up 0.11% to 96.612 from 96.491 yesterday.

Business Insider Australia Unemployment Rate and Employment Chart - 22 February 2019
Business Insider Australia Unemployment Rate and Employment Chart – 22 February 2019
  • AUD/USD – initially rallied on the robust Employment data to 0.7207 before Westpac issued its call of an RBA rate cut. AUD/USD then slipped back to 0.7160/70 where it first started from. The Aussie then took a big hit from the report of China’s ban on Australian Coal Imports. AUD/USD slumped 1 cent to 0.7070 from 0.7170 before settling at 0.7085. Australia’s Minister for Resources Josh Fridenberg said that Australian exports to China would remain strong.
  • EUR/USD – stuck to a familiar tight range in light, features trade between 1.1322 to 1.1366. The Euro closed little-changed at 1.1338 from 1.1345 yesterday.
  • USD/JPY – also stuck in a relatively tight range between 110.567 and 110.862. The Dollar closed at 110.70. The US Ten Year bond yield was up to 2.69% from 2.65%.

On the Lookout: Apart from the Australian Dollar, trading in the rest of the Majors was light. The US Dollar managed to claw back initial losses from the weaker-than-expected Durable Goods and Existing Home Sales data. Traders are searching for the next catalyst to shake things up.
The Aussie was slammed by the Chinese announcement on imports of Australian Coal into its Dalian Port. Dalian handles the equivalent of around 2% of Australia’s coal exports. Prior to that, Westpac Chief Economist Bill Evans revised down their GDP forecasts, lifted the Unemployment rate and gave their expectations of up to two RBA rate cuts this year.
RBA Governor Philip Lowe delivers his semi-annual testimony to the House of Representatives Standing Committee on Economics at 9.30 am Sydney time. No doubt Lowe will talk on policy, the economy and other issues.
Today sees German IFO Business Climate, Eurozone Q4 2018 Final Headline and Core CPI, and Canadian Headline and Core Retail Sales. FOMC Members Williams, Clarida and Quarles are all speaking at a US Monetary Policy Forum in New York (4-5.30 am Saturday 23 Feb Sydney time).

Trading Perspective: The Dollar managed to claw back modest gains despite weaker-than-expected data. US Existing Home Sales fell to 3-year lows while Philadelphia’s Fed Manufacturing Index dropped to -4.1 from 17 in January. This was the first negative reading since May 2016. Wall Street stocks pared back their losses to end 0.5% down. Traders continue to digest reports on the US-China trade negotiations. This may well be where the first drivers to shake the markets may come from.
The Australian Dollar once again looks soft at the lower end of it’s trading range. According to Callam Pickering, APAC Economist for the global jobsite Indeed, “The RBA will not cut rates if momentum in the labour market persists.”

Daily FX.COM - AUD USD 1H Chart - 22 Feb 2019
Daily FX.COM – AUD USD 1H Chart – 22 Feb 2019
  1. AUD/USD – From my trading experience, the Aussie always looks weakest when it’s near its lowest point. While Wages are still soggy, employment remains strong. Any positive development on the US-China trade talks could see a big turnaround on the Aussie. While the momentum is currently on the downside, we should see some good buying support near its lows. The US Dollar may still have room to correct downwards and this is supportive for the Battler. AUD/USD has immediate support at 0.7060/70 followed by 0.7030. Immediate resistance can be found at 0.7110 and 0.7140. Look to buy dips near the 0.7060 level.
  2. EUR/USDThe Euro looks likely to extend its sideways trading between 1.1320 and 1.1370 today with perhaps slightly more downside in the short-term. EUR/USD has immediate support at 1.1320 followed by 1.1300. Immediate resistance can be found at 1.1370 and 1.1400. Look to trade a likely range of 1.1310-1.1360.
  3. USD/JPY – The Dollar should find support today at 110.50 given the higher level of US 10-year yields. Topside resistance can be found at 110.90 and 111.00 which should cap on the day. Trade negotiations between the US and China will still be the main driver of this currency pair. With yesterday’s US call on stability for China’s Yuan in their trade talks, the Yen may be an issue when Japan and the US meet on their trade. Look to sell USD/JPY rallies to 111.00.
  4. GBP/USD – Sterling slipped against the Dollar to finish at 1.3035 from 1.3060 yesterday. While talks between British PM May and EC President Juncker yesterday were described as “constructive”, traders remain sceptical. GBP/USD has immediate support at 1.3020 and then 1.3000. Immediate resistance lies at 1.3100. Look to trade between 1.3000/60 today.

Happy Friday and trading all.