When a currency has as many problems as the Australian dollar, its strengthening surprises both investors and the Reserve Bank. How will this affect AUDUSD? Let’s figure it out and make up a trading plan.
Monthly Australian dollar fundamental forecast
Looking at the dynamics of AUDUSD, one can see that the market is full of optimists. They are confident that Australia’s imminent lift of lockdowns will accelerate its GDP in the fourth quarter, weak statistics on China will force the PBoC to increase monetary stimulus, and the fall in iron ore prices is temporary. They buy Aussie on rumors. The problem is that there is usually a huge difference between desire and reality.
What is happening with the financial markets is puzzling not only to me, but also to Philip Lowe. The head of the RBA noted that accelerating inflation and economic recovery could provoke other central banks to normalize monetary policy. But Australia has its own history. The Reserve Bank’s experience in inflation and wages suggests that it is not worth counting on an increase in the cash rate in 2022 or early 2023, as derivatives do. The rate will remain at a record low level until 2024.
Dynamics of cash rate and expectations of its change
As the RBA expects a 2% decline in GDP in the third quarter due to lockdowns with the wording “perhaps much more,” it is difficult to understand why the AUDUSD price soared so high. Is it time to come down to earth?
Iron ore, a key component of Australian exports, soared to a record high of $230 per ton in May. However, then a decline began, which continues to this day. However, optimists are confident that it will end soon. The fate of iron ore is decided by China, which intends to fix steel production at just over 1 billion in 2021. In the first half of the year, the companies faced overproduction, and now they are forced to curtail their activities to meet the established quotas.
Dynamics of AUDUSD and iron ore
Source: Trading Economics.
Good news from the talks between the presidents of the United States and China and the expectation of a new monetary stimulus from the PBoC, which could accelerate China’s economy, had a positive impact on the yuan. Xi Jinping said it was time to get the relationship back on track. However, it is unlikely that Joe Biden will cancel the import duties imposed by Donald Trump.
A serious risk factor for AUDUSD is the development of the S&P 500 correction against the background of the Fed’s faster transition to normalization of monetary policy than investors currently expect. Another factor is the rejection by Congress of the new fiscal stimulus project from Democrats. These events will contribute to the strengthening of the US dollar against the major world currencies.
Monthly AUDUSD trading plan
Fun’s over. This is what can be said about the AUDUSD bulls. I recommend selling the pair in the direction of levels 0.728, 0.722, and 0.714. The release of weaker statistics on the Australian labor market than Bloomberg experts expect and the publication of data on Chinese retail sales and industrial production can be considered news reasons.
Price chart of AUDUSD in real time mode
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