The Australian Dollar (AUD) has seen a significant boost this week, gaining nearly 1% against the U.S. Dollar (USD), primarily driven by positive inflation data from China and hints from the Bank of Japan (BoJ) about ending its era of negative interest rates. The AUD/USD pair was trading at 0.6422 on Tuesday, following a sharp climb during the North American session on Monday, where it saw gains of 0.97%, reaching 0.6436 after hitting a daily low of 0.6376.
The AUD's strength is partially attributed to China's latest inflation report, which showed the Consumer Price Index (CPI) for August expanding by 0.1% YoY, following a -0.3% number in July. This positive development in China, Australia's largest trading partner, has underpinned the AUD, which is sensitive to China's economic developments.
Furthermore, comments from BoJ Governor Kazuo Ueda hinting at the potential end of negative interest rates have also bolstered the AUD while weakening the USD. The indication spurred a reaction on Japanese Yen (JPY) shorts, sparking JPY gains by close to 1%.
Apart from these factors, the AUD was also boosted by a risk-on market mood and an upbeat global equities rally spurred by China's data portraying an exit from a deflationary scenario.
On the domestic front, upcoming Australian economic data includes Westpac Consumer Confidence and NAB Business Confidence. The former is expected at 0.6% in September, while the latter is anticipated to dip to 1 in August, up from a -2 contraction in July.
On the U.S. side, the release of the Consumer Price Index (CPI) for Wednesday, August will be crucial. If U.S. inflation comes hotter than expected, it could be positive for the USD and negative for the AUD, as it would suggest the Federal Reserve needs to tighten monetary policy.
From a technical perspective, the AUD/USD is undergoing an upward correction after diving toward a year-to-date (YTD) low of 0.6357. However, for buyers to remain hopeful of higher prices, a daily close above the prior week’s high of 0.6521 is needed.
The AUD's performance this week has been influenced by various policy steps from the People’s Bank of China and commentary from the Bank of Japan, according to Sean Callow, senior currency strategist at Westpac. He noted that near-term yuan depreciation has reached a sensitive stage for Chinese authorities, which should help keep the AUD/USD away from last week’s 10-month lows. He added that tangible positive news on China’s economy is needed to fuel substantial covering of asset managers’ record A$ net shorts which are worth A$9.6 billion.
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