Chinese Trade Balance Tops Forecasts But A Head and Shoulders Pattern Just Formed on AUDUSD

It’s been a thrilling Asian trading session for AUDUSD so far. Initially, the currency pair dropped from its session highs at 0.6906 to 0.6883 on news which reiterated that China will buy up to 200 billion USD-worth of US goods in the next four years. However, the Aussie was able to quickly recover its losses on positive Chinese trade balance data. AUDUSD is now trading around its opening price at 0.6901.

Chinese Trade Balance Driven by US Demand

According to official government data, China’s yuan-denominated exports topped imports by 329 billion in December. It was only expected to reveal a 315 billion yuan trade surplus. Meanwhile, the country’s USD-denominated trade surplus was higher at 46.8 billion than the 45.8 billion consensus. China’s custom’s agency noted that the positive figures were mostly driven by an uptick in US purchases for the month. Should the phase one deal be finalized, it can be expected that China will continue to churn out stellar trade surplus figures.

US-China Phase One Deal Weighed Down the Aussie

Speaking of the deal, market sentiment is now buoyed by excitement over the signing of the phase one agreement. The Chinese delegation of negotiators are already in Washington and are scheduled to sign the phase one deal on Wednesday, January 15.

It was interesting to see the Aussie slide the markets were once again reminded of details of the deal. It’s still unclear why; it may be a technical move. However, there are some speculations that the significant commitment of 200 billion USD for purchases of US goods may raise concerns about China’s debt. Some also say that more share of US imports could mean that China will have lesser resources to buy from its other trading partners, like Australia. We will provide updates on this matter as details come into light.

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AUDUSD Outlook

On the hourly time frame, we can see that AUDUSD initially made higher highs but what succeeded by a lower high. In effect, it formed what we refer to as a head and shoulders pattern. When you enroll into our forex trading course, you will learn that this is widely considered as a bearish indicator. It’s a little counter-intuitive given that positive Chinese data is often bullish for the Aussie.

The currency pair has already broken through neckline support and is currently testing it for resistance. It also seems to coincide with the 50% Fib level (when you draw the Fibonacci retracement tool from yesterday’s New York session highs to today’s lows). Reversal candles around this price, around the 0.6900 handle, could mean that sellers are priming to move AUDUSD to near-term support at 0.6877. If support does not hold there, the next floor could be at 0.6848 where the currency pair made lows earlier this month.

On the other hand, if today’s positive Chinese data is enough to draw in buyers, a bullish close above yesterday’s highs at 0.6915 would invalidate the chart pattern. It could then mean that AUDUSD is on its way to trend line resistance around 0.6930.

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AUDUSD, hourly chart

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