The Australian dollar looked set to fall below 70 cents before China's currency suddenly rallied

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  • The Australian dollar fell to the weakest level since February 2016 on Friday before ripping higher into the close.
  • It’s performance mirrored movements in the Chinese yuan after it fell to the weakest level in over a decade against the US dollar.
  • The performance of the yuan will likely dictate broader movements in currency markets on Monday.

The Australian dollar endured a wild session on Friday, tumbling in Asian trade to fresh multi-year lows against the greenback before storming higher into the close.

Much of the Aussie’s gyrations mirrored similar movements in both the offshore and onshore traded Chinese yuan during the session.

Here’s how things currently stand at 8am in Sydney, Monday morning.

AUD/USD 0.7096 , 0.0002 , 0.03%
AUD/JPY 79.38 , 0.12 , 0.15%
AUD/CNH 4.9334 , 0.0086 , 0.17%
AUD/EUR 0.6228 , 0.0019 , 0.31%
AUD/GBP 0.5533 , 0.0012 , 0.22%
AUD/NZD 1.0868 , -0.0006 , -0.06%
AUD/CAD 0.9286 , 0.0036 , 0.39%

After a quiet start to the day, the AUD/USD was jolted lower midway through the session, falling to the lowest level since February 2016 as the onshore traded yuan, or CNY, fell to fresh decade-lows against the greenback.

“From an intra-day low in mid-morning London trade of 0.7023, the AUD/USD staged a decent comeback to close at 0.7090,” said Ray Attrill, Head of FX Strategy at the National Australia Bank.

“Among the drivers for the recovery was firstly a small rebound in the Yuan.

“Reuters late Friday cited ‘unidentified policy insiders’ as saying that China would use its ‘vast’ FX reserves to defend CNY against a move above 7.”

The recovery in the yuan in the second half of the session, along with broader gains in emerging market currencies as well as strength in iron ore and energy prices — two of Australia’s big three commodity exports — helped the Aussie dollar rip higher in North American trade despite the release of a stronger-than-expected advanced Q3 GDP report from the United States.

Investing.comAUD/USD Hourly Chart

US GDP grew at a seasonally-adjusted annual pace of 3.5%, down from 4.2% in Q2 but above the 3.3% level expected.

Growth was lopsided in the quarter with consumer spending powering activity at a 4% annualised pace due to elevated confidence, tax cuts and a solid labour market,” said strategists at Westpac Bank.

“Volatile inventories also made an outsized contribution, adding 2.1ppts to Q3’s 3.5% growth rate.”

“Against that, there are several areas of caution that tempered the GDP result. Net exports detracted from growth as did residential investment, while business investment was lukewarm, rising just 0.8% annualised — its slowest pace in two years and a disappointing outcome given last year’s corporate tax reforms.”

Despite the headline GDP beat, the US dollar index gave back earlier gains to finish the session lower.

There was little reaction to news that ratings agency Standard and Poor’s placed Italy’s BBB sovereign long-term credit rating on watch negative given that outcome was widely expected by financial markets.

However, while the Euro was largely unchanged on the news, it has fallen in early trade on Monday morning following an unsettling performance from Germany’s ruling political parties at regional elections held in Hesse.

“Chancellor Angela Merkel’s Christian Democratic Union (CDU) had its worst showing in the state in more than 50 years, while the Social Democrats (SPD) — the CDU’s coalition partner — garnered its lowest support there since World War 2,” said Elias Haddad, Senior Currency Strategist at the Commonwealth Bank.

“The Hesse result raises fears over the collapse of Germany’s ruling CDU SPD coalition.”

Turning to the day ahead, it will be a slow start from an economic data perspective with few major releases scheduled in Asia.

Japanese retail sales for September is the headline act.

Given the quiet economic calendar, the performance of the Chinese yuan will almost certainly dictate the performance of broader currency markets in Asia, especially for the Australian and New Zealand dollars.

Later in the session, other highlights include UK consumer credit along with personal consumption expenditures and income growth, Core PCE inflation and the Dallas Fed manufacturing index from the United States.

On the central bank front, Charles Evans of the Chicago Fed is scheduled to speak.

The UK budget and economic growth forecasts from the European Commission are also set to be released.

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