Forex Market: AUD/USD rebounds, drawing support from extended recovery in China’s economy in Q3

After retreating more than 2% last week, AUD/USD began the new week on a stronger footing, supported by macro data showing China’s rebound from the coronavirus pandemic remained on track during the third quarter.

China’s economy grew at an annualized rate of 4.9% in Q3, which fell short of market expectations of a 5.2% growth, but still, annual growth in September retail sales and industrial production exceeded a consensus of estimates, while being the strongest since December 2019.

“The (Chinese) GDP numbers came in slightly below expectations, but the monthly data shows there is no reason to be overly pessimistic,” Yoshiko Shimamine, chief economist at Dai-ichi Life Research Institute, said.

“China’s economy remains on the recovery path, driven by a rebound in exports. Consumer spending is also headed in the right direction, but we cannot say it has completely shaken off the drag caused by the coronavirus.”

At the same time, the US Dollar was holding gains from last week against major peers on concerns over virus spread in the US and Europe, uncertainty surrounding US presidential election and fading optimism over a US stimulus deal beforehand.

Meanwhile, Australian 10-year government bonds were a fraction lower on Monday. Last week 10-year bonds rallied after Reserve Bank of Australia Governor Philip Lowe said yields were among the highest in the developed world and the central bank could consider if purchasing the debt in the market would drive yields lower.

Investors largely expect the Australian central bank to reduce the official cash rate to 0.10% and bolster quantitative easing at its upcoming policy meeting on November 3rd.

“The near-term risk environment remains uncertain and potentially volatile as we head into the US election,” Nomura strategists wrote in an investor note.

“We believe the RBA is easier to read and note what we see as a significant shift in its thinking and policy approach, which is clearly tilting in a dovish direction.”

As of 7:33 GMT on Monday AUD/USD was edging up 0.31% to trade at 0.7098, while moving within a daily range of 0.7071-0.7109. The major pair has dropped 0.88% so far in October, after retreating 2.91% in September, its first monthly loss since March.

On today’s economic calendar, markets will be expecting a speech by Fed Chair Jerome Powell at 12:00 GMT as well as statements from four more Fed officials later in the day for clues over outlook.

Bond Yield Spread

The spread between 2-year Australian and 2-year US bond yields, which reflects the flow of funds in a short term, equaled 0.2 basis points (0.002%) as of 6:15 GMT on Monday, up from -0.2 basis points on October 16th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.7082
R1 – 0.7093
R2 – 0.7109
R3 – 0.7121
R4 – 0.7132

S1 – 0.7065
S2 – 0.7054
S3 – 0.7037
S4 – 0.7020