Despite a very tough week for risk FX, with EUR/USD falling to fresh yearly lows in the wake of weaker than expected US Non-Farm payrolls, one currency amongst the majors has shown relative strength both on a fundamental and a price basis. The Australian dollar last week performed well, recapturing the 1.0300 figure before sucummbing to some proft taking post NFP. The key takeaway from last week’s trade was the fact that the RBA is finished with its rate cutting cycle for the time being. In its monthly monetary policy meeting the Australian central bank did warn that, “Growth in the world economy picked up in the early months of 2012, having slowed in the second half of 2011. But more recent indicators continue to suggest weakening in Europe and a slower pace of growth in China.“ However, the RBA left its benchmark rate unchanged at 3.5% stating that monetary policy was “appropriate”.

Overall the RBA appears to be content with the current state of monetary policy and may continue to keep rates on hold for the foreseeable future. Conditions in the Australian economy remain near equilibrium levels and unless global demand and especially growth in China weakens materially the RBA is unlikely to ease further after having cut rates by 125 basis points since last November.

That leaves the Aussie the King of the Carry in the currency market where all the other in G10 interest rates are at or near 0% level. This week, the key driver of Aussie strength will be the release of Chinese Trade data on Monday night and the release of Australian employment report at 9:30 PM EST on Wednesday evening. The market anticipates a very modest gain of 0.3k after last month’s monster 38K print. If the data surprises to the upside much like other recent economic reports from Down Under then the Aussie could recapture the 1.0300 level as risk flows flock to the unit.

There is some cause for concern however, the latest ANZ job advertisements data has shown a decline of -1.2% from the month prior marking the third month in a row that job adverts have decreased. Nevertheless that data has not correlated well with the unemployment report and we could see positive divergence once again.

Ultimately, the fate of the Aussie this week will depend risk flows and the markets perception of Chinese growth. Today’s modest Chinese CPI data provides ample room for Chinese authorities to ease monetary policy further, while tomorrow’s trade data if it comes in close to estimates may allay fears of a serious export slowdown. In order to reestablish its uptrend the Aussie needs to recapture the 1.0300 barrier which would open the way for a run towards recent swing highs at 1.0450.

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