Why is the Australian Dollar still subdued as China’s Trade Surplus narrows in October?

• AUD remains under pressure after China’s October trade surplus narrowed to $105.28 billion from $133.53 billion previously.
• In yuan terms, China recorded a sharply smaller October trade surplus of CNY 712.78 billion, compared with CNY 905.97 billion in the preceding month.
• The US Dollar continues to draw support against major currencies as expectations of a Fed rate hike climb to 84%.

Selling pressure has returned to AUD/USD, with the pair trading near 0.6920 in Tuesday’s Asian session after gaining nearly 1% a day earlier. Weighing on the pair is continued weakness in the Australian Dollar (AUD) following trade balance figures from China, a close trading partner of Australia.

According to the National Bureau of Statistics of China, October’s trade surplus narrowed from $133.53 billion to $105.28 billion, below the market estimate of $125.8 billion for the month. Export growth slowed from 36.3% to 35.2% year-over-year (YoY), compared with expectations of 33.5%. Imports, by contrast, increased 41.6% YoY after 31.0% previously, exceeding the 32.0% forecast.

Measured in Chinese Yuan (CNY), China’s October trade balance showed a surplus of CNY712.78 billion against CNY905.97 billion previously and a market projection of CNY859 billion. At 28.7% YoY, export growth moderated from September’s 29.6%. Import growth, however, was significantly higher at 34.7% YoY, compared with the earlier reading of 24.6%.

A recovery in AUD/USD remains possible, however, as growing speculation over a potential diplomatic breakthrough between Washington and Tehran could reduce safe-haven demand and weigh on the US Dollar (USD). Crude oil prices have also fallen to their lowest level since August, helping to ease inflationary pressure.

Describing the war as "militarily, effectively over", US President Donald Trump said additional military strikes against Iran appeared unnecessary. He nevertheless maintained that the US remained "locked and loaded" to safeguard regional stability at the request of neighbouring nations.

Next on traders’ radar are US economic releases, with Tuesday’s October Consumer Price Index (CPI) report taking centre stage. Headline inflation is forecast to rise from 3.7% to 3.9% year-over-year, while the core reading is expected to increase to 2.8% from 2.6%. Expectations of higher interest rates have strengthened following last week’s robust Nonfarm Payrolls report and hawkish comments by Federal Reserve officials, including Richmond Fed President Thomas Barkin and Chicago Fed President Austan Goolsbee. The CME FedWatch Tool puts the probability of a Fed rate hike at the December meeting at 84%, a jump from 76% a day earlier.