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Is there further upside for the Australian dollar?

Is there further upside for the Australian dollar?

The Australian dollar could struggle to make further short-term gains after data out of China showed underlying economic activity remains weaker than expected.

China's February trade numbers were "disappointing and highlight that Chinese economic activity remains weak", Elias Haddad, Commonwealth Bank (CBA) director of FX strategy and international economics, said in a note.

China's trade surplus narrowed over the month as exports plunged 29%, while an 18% contraction in Chinese imports "points to soft domestic demand", according to Haddad.

He added that although the Lunar New Year celebrations in China might have cut into the February trade numbers, "more aggressive fiscal and monetary stimulus measures from Chinese policy makers is necessary to ensure a sustained recovery in Chinese economic activity".

$A high point

The Australian dollar (AUD) has hit a high for the year at US74.69 cents, a level not seen since July 2015.

It’s up more than 9% from its January low when it was heading toward US68 cents, in defiance of forecasts that were predicting it would weaken.

Commonwealth Bank currency analysts at the beginning of 2016 forecast the Australian dollar to drop to US65 cents by the end of March before recovery towards US70 cents by the end of the year.

The China factor

China's National People's Congress (NPC) started on Saturday and continues until March 15. So far announcements have confirmed China’s gross domestic product (GDP) growth target for 2016 has been cut from 7% to a range of 6.5-7.0%.

However, the risk of a hard-landing in Chinese economic activity appears further reduced after policymakers in China announced they aim to pursue more expansionary fiscal and monetary policies in 2016. 

But in a speech yesterday, the Reserve Bank of Australia (RBA) deputy governor Philip Lowe said Australia's economy remains resilient and the main downside risks "lie in the international sphere", namely China.

Lowe repeated the RBA's previously stated view that Australia's "low inflation outlook provides scope for easier monetary policy should that be appropriate in supporting demand growth in the economy".

This stance indicates that the RBA is prepared to cut the cash rate further from its current record low 2% if it deems that action necessary.

British Brexit concern

The Australian dollar is at its highest level against the British pound (GBP) since May 2015, holding above 52 pence compared with 48.81 pence on January 25 and around 45.45 pence in August last year.

Following months of negotiations, the UK Prime Minister David Cameron reached a deal with the European Union (EU) council at the recent EU Leaders Summit aimed at keeping the UK within the common bloc.

Now a formal domestic campaign is underway. The pound tumbled in February as London mayor Boris Johnson gave his support to the "Brexit" campaign which supports Britain leaving the EU. 

The UK will hold a referendum on June 23 this year on its EU membership.

In testimony to a House of Commons committee this week, Bank of England governor Mark Carney described Britain's potential exit from the European Union as the single biggest domestic risk to the nation's economy.

"The uncertainty generated by the UK’s referendum on its EU membership, the UK’s large current account deficit (4.7% of GDP) and slowing momentum in the UK economy will continue to undermine GBP," said Haddad.

The Australian dollar has traded at its highest level this year against the euro.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice.