The Australian dollar bounced off a seven year low on Monday as opportunistic buyers bet on a burst back above US70¢ but risks remain ahead of key data from China.
Over the weekend, the dollar dived 2.4 per cent to US68.31¢, its lowest level since March 2009, after Wall Street fell more than 2 per cent on Friday, compounding the market negativity that sent global markets off to their worst start to the year on record.
In late trade on Monday the Aussie was buying US69.11¢. OANDA Asia Pacific senior technical analyst Stuart McPhee said the boost came from "opportunistic" buyers betting on a recovery back above US70¢.
"There will be limited trading from the US due to a public holiday [Martin Luther King Day], people are thinking 'we're going to get a 24-hour grace period here'," he said.
The US70¢ level has proved a key pyschological barrier for foreign exchange traders. The last time the Aussie dropped below that level was in September before it clawed back, a recovery investors are now banking on.
The Australian dollar has fallen 6.2 per cent since December 31 as commodities including oil and iron ore teeter at or near multi-year lows.
Oil under fresh pressure
The most affected commodity this year, crude oil, fell to just $US29.89 a barrel. The commodity has come under fresh pressure as the lift in sanctions against oil-producing nation Iran may deliver more oil into an already saturated market.
But China remains chief driver of turmoil and Commonwealth Bank of Australia senior currency strategist Elias Haddad said key data indicating the health of the world's second-biggest economy was likely to cause volatility commencing Tuesday.
"There is the risk of further disappointment in Chinese economic activity," he said.
China's fourth-quarter gross domestic product is released on Tuesday. The market is anticipating GDP growth to remain at 6.9 per cent year on year, just short of the government's 7 per cent target.
Also on deck from China is industrial production, retail sales and fixed asset investments.
"The risk is that judging from recent leading indicators from China, the data continues to disappoint and that will further translate to more fears on how severe China's economic slowdown is and weigh on commodity currencies," Mr Haddad said.
But Mr McPhee said investors were increasingly taking Chinese data in their stride and numbers were now beginning to reflect a more realistic picture of the Chinese economy after some data, including GDP, had been greeted with scepticism.
"I don't think there's much out of China surprising us anymore," he said.
The International Monetary Fund is also set to provide its global growth outlook this week. Last month, managing director Christine Lagarde said growth in 2016 would be "disappointing".
Mr Haddad said it was possible the IMF could provide a "constructive" outlook given the boost that lower oil prices typically have on global growth.
"Obviously the other big factor that could influence the Australian currency is the extent of the US dollar rally, especially against the commodity currencies," Mr Haddad said.
The US dollar has been fairly stable against the yen and the euro, but has outperformed against the commodity-linked currencies such as the Australian, New Zealand and Canadian dollars, and would likely continue to do so amid the market rout.
Commonwealth Bank is tipping the Australian dollar to hit US65¢ by the end of the first quarter, with the risk towards falling beyond that.