AUD\/USD hovered near 0.7030 on Friday, little changed after a sharp rise the previous session. The pair has been underpinned by a softer US Dollar, but momentum has been capped by weaker Chinese readings. China\u2019s NBS Manufacturing PMI fell to 49.2 in July from 50.3 and undershot the 50 forecast, while the Non-Manufacturing PMI slipped to 49, also below expectations, reinforcing evidence of cooling activity in Australia\u2019s main trading partner.<\/p>\n
In the US, GDP growth slowed to 1.5% in Q2 from 2.1% in Q1 and missed the 2.1% consensus, sustaining pressure on the Greenback. Australia\u2019s policy lens has shifted after Q2 CPI rose 0.6% qoq versus 0.7% expected and 1.4% in Q1, while annual inflation eased to 3.8% yoy from 4.0%. Annual core inflation edged up to 3.6% from 3.5% but came in below the 3.7% consensus; 2-year Australian government bond yields fell 8.3bps to 4.49%, and pricing for an August 11 RBA hike dropped to 2% from 18%.<\/p>\n
We believe derivative traders should prepare for a range-bound AUD\/USD in the coming weeks as conflicting forces keep the pair steady around 0.7030. While a weak US Dollar is keeping the pair afloat, China’s economic contraction is preventing any major breakout. Historically, when China’s Manufacturing PMI drops below the 50-point threshold\u2014as it just did by falling to 49.2\u2014Australian Dollar rallies face immediate exhaustion.<\/p>\n
On the other side of the pair, we see the US Dollar struggling after US second-quarter GDP growth slowed sharply to 1.5%. This sluggish growth makes aggressive US monetary tightening highly unlikely, keeping a solid floor under the AUD. Derivative traders can exploit this tight trading window by selling out-of-the-money call and put options to capture premium while the exchange rate consolidates.<\/p>\n
We must also adjust our positions ahead of the Reserve Bank of Australia’s August 11 meeting, where the probability of a rate hike has collapsed to just 2%. Australia’s Q2 inflation cooling to 3.8% has already dragged 2-year government bond yields down by 8.3 basis points to 4.49%. Because of this, we recommend focusing on short-term AUD\/USD swaps and avoiding long Australian dollar positions, as the lack of interest rate support will limit any upward momentum.<\/p>\n\n\n\n