FxWirePro: Driving forces of prevailing AUD spikes, can rallies prolong in Q3? China prints mixed bag of economic numbers for Aussie – Stay hedged in balance

AUDUSD is breaking higher towards 0.7700.

In medium term perspectives, much of AUDUSD's 3 cent gain in June was driven by broad US dollar weakness. But there has also been a partial recovery in Australia's key commodity prices, after very steep declines in April and May.

While a return to June's commodity price lows is unlikely in coming weeks, we doubt there will be fuel for sustained gains much beyond the 0.77 handle.

A firmly on hold RBA is also likely to keep a lid on AUDUSD, easing to 0.76 over the month and back to 0.74 by September.

Since China has been the major trade partner of Australia and the Aussie’ trade exposure towards China is considerable, we would like to shed some light on Chinese macroeconomic numbers.

China's trade surplus fell to USD 42.77 billion in June of 2017 from USD 45.16 billion a year earlier while market expected a USD 42.44 billion surplus, as exports rose less than imports. Year-on-year, sales grew by 11.3 pct to USD 196.6 billion, faster than an 8.7 pct rise in the prior month and beating estimates of an 8.7 pct growth. Purchases jumped 17.2 pct to USD 153.8 billion, compared to a 14.8 pct increase in a month earlier and above consensus of a 13.1 pct rise.

The Caixin Manufacturing PMI in China unexpectedly rose to 50.4 in June of 2017 from 49.6 in May and beating market consensus of 49.5. It was the highest reading since March, as output and new export orders increased at a faster pace. Also, buying activity rose slightly.

While firms trimmed their workforce number again and backlogs of work continued to rise. Optimism toward the business outlook fell to the lowest so far this year.

Accordingly, to arrest FX risks we advocate below FX derivatives:

AUDUSD - USDCNH 2M straddle spreads, 100:125 vega ratio.

Since the RBA outlook is on hold for some time, it is anchoring front end valuations. 3yr swap rates are expected to remain in a 1.8% to 2.3% range, with core inflation still below 2%.

Currency Strength Index: FxWirePro's hourly AUD spot index is popping up at 128 levels (which is highly bullish), while hourly USD spot index was at shy above -133 (which is extremely bearish) at 06:15 GMT. For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex.

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