The Australian Dollar (AUD) has successfully rebounded from its recent low of 0.6443 following the release of last week's US Consumer Price Index (CPI) data. This recovery implies a potential exhaustion in the prevailing trend of a stronger US dollar throughout this year. In the short term, we anticipate a modest upward bias, bolstered by Chinese authorities closely monitoring stocks and standing ready to intervene, especially with the looming Chinese National People’s Congress scheduled for March 5th.

Adding to the positive sentiment, major Australian mining companies reporting earnings this week have sparked market discussions about dividend conversion, leading to increased demand for AUD among Australian shareholders. Westpac estimates a substantial demand for AUD, amounting to around A$4.8bn this week.

However, it's worth noting that gains may be capped around the 0.6625 resistance level. The broader narrative of the US economic resilience remains strong, the Reserve Bank of Australia's (RBA) outlook is currently neutral, and the recent volatility in China's stock market is not anticipated to have a significant impact on longer-term global investor sentiments.

Institutional accounts on the Chicago Mercantile Exchange (CME) displayed a notably bearish stance last week, with a net short position of -AUD9.6bn, the most pessimistic since September 2023. Significant short-covering would require a substantial shift in this sentiment.

Looking ahead, there is a potential for AUD/USD to test the 0.6350/0.6400 area in the multiweek timeframe, suggesting a cautious outlook for the Australian dollar. As we navigate these dynamics, it's crucial to stay vigilant for any abrupt changes in market sentiment and economic indicators.

AUD's Rebound, Chinese Factors, and the Path Ahead

Feb 26 2024

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