Before the US struck trade deals with Japan and the EU, the uptrend in the AUDUSD pair looked strong. However, those agreements changed the game, and the weaknesses of the aussie quickly came to light. Let’s explore this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Monetary policy divergence is weighing on the AUDUSD pair.
- Deteriorating risk appetite is putting pressure on the Australian dollar.
- Yuan depreciation is a bearish factor for its proxy currencies.
- Consider selling the AUDUSD pair with targets at 0.638 and 0.63.
Weekly Fundamental Forecast for Australian Dollar
The market never stands still. Clinging to outdated strategies can quickly make you look out of touch. At first, NAB and Deutsche Bank’s forecasts predicting that the AUDUSD pair would climb to 0.67–0.68 by year-end seemed reasonable, especially with Australia’s massive pension funds, managing over AU$4.1 trillion, ramping up currency hedging on their US investments. But then the US won the trade wars, and everything changed.
The agreements between the US and Japan and the EU paved the way for the strengthening of the US dollar. The agreements included 15% tariffs and pledged investments in the US economy of more than $1 trillion. Along with fiscal stimulus worth $3.4 trillion, these measures will help stock indices continue their rally. Consequently, the demand for currency hedging by Australian pension funds may decrease, leading to a decline in the AUDUSD pair.
The Reserve Bank of Australia’s policy is causing the sell-off in the Australian dollar. A spike in unemployment and a slowdown in inflation, with core CPI reducing to 2.1% and core inflation to 2.7% in Q2, have given the RBA room to act. The derivatives market expects a 25-basis-point rate cut to 3.6% in August, with a total of three cuts expected before the beginning of 2026. In contrast, the Fed’s reluctance to restart its easing cycle is a clear bearish factor for the AUDUSD pair.
Inflation in Australia and Other Countries
Source: Bloomberg.
Although Australia swiftly reached an agreement with the US and avoided major fallout with a modest 10% tariff, its economy and exports remain heavily reliant on the health of its key trading partners. In that context, China’s retaliatory 30–50% tariffs on US imports cast serious doubt on the sustainability of the AUDUSD pair’s uptrend. According to Treasury Secretary Scott Bessent, without a trade agreement, rates could have surged to 80–85%.
China is far from invincible. The slowdown in July’s PMI and the IMF’s 2025 GDP forecast of just 3.8%, well below the government’s 5% target, highlight the country’s vulnerabilities. The sharp drop in the yuan tells a similar story, prompting the People’s Bank of China to intervene in the currency market. Stability only returned after the central bank set a stronger-than-expected reference rate for the yuan.
Yuan Exchange Rate Trends and Divergence
Source: Bloomberg.
The renminbi remains under pressure, and any further weakness would weigh on the AUDUSD pair. A potential correction in US stock indices poses a similar risk. The stock market is entering an unfavourable period between August and September, and much of the bullish momentum already appears priced into S&P 500 quotes.
Weekly AUDUSD Trading Plan
Monetary policy divergence, the weakening of the yuan, and deteriorating global risk appetite are reasons to sell the AUDUSD pair. The price has reached both targets of 0.651 and 0.6435 for the previous short trades. Thus, consider short trades on pullbacks with targets at 0.638 and 0.63.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of AUDUSD in real time mode
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