The AUDUSD was 7% down from the October highs and should have continued falling deeper. However, buyers have reasons to go ahead. Let’s discuss this topic and make up a trading plan.
Monthly Australian dollar fundamental forecast
Increased global risk appetite, the RBA optimism, and positive reports on China’s economy have supported the Australian dollar. The Aussie has been under pressure because of the omicron. However, once the fears due to the new strain of COVID-19 gave way to hopes that the pandemic would stop, the AUDUSD bulls have been going ahead. If the South African variant of the coronavirus does not lead to an increase in the number of hospitalizations, it may not be that dangerous. The omicron can well displace the delta and become a kind of seasonal flu. If so, isn’t it time to buy risky assets?
The Australian dollar, due to the higher yields on local 10-year bonds, compared to most G10 currencies, except for the New Zealand dollar, is still considered to be a risky asset. Therefore, the S&P 500 rally, supported by the news from South Africa, sent the AUDUSD up from its 14-month lows. The Aussie is also supported by the growth of Chinese imports and exports to record highs in November. China is the primary trading partner of Australia, so China’s economic strength is a reason to buy the Australian dollar.
Dynamics of China’s foreign trade
The information about the omicron was positively interpreted not only by financial markets but also by the RBA. Following the results of the RBA December meeting, Philip Lowe noted the high level of vaccination in the country, a significant increase in household consumption. He also expressed confidence that the Australian economy will return to robust growth despite the new variant of COVID-19.
Amid the central bank’s optimism, the derivatives market retains the chance of the interest rate hike in May and bets on a soon tapering of the quantitative easing programme by the RBA. According to the Commonwealth Bank of Australia, in February, the regulator will most likely announce the reduction of the asset purchase program from AU $4 billion to AU $2 billion per week and signal the QE completion in the near future. National Australia Bank argues that, although Philip Lowe and his colleagues say they won’t raise the cash rate until 2024, the rise in inflation and wages will force them to take steps to tighten monetary policy much earlier. Probably in the fourth quarter of 2022.
Dynamics of Australia’s inflation and RBA interest rate
Therefore, the AUDUSD bulls can well develop an upward correction, and the matter is how high the price will grow. In the medium term, the Australian dollar looks weaker than the US dollar. First, China’s economy is not that strong as it seems, based on the foreign trade data. If it were otherwise, the People’s Bank of China would not cut the reserve requirement ratio from 8.9% to 8.4%. Second, the Fed is willing to tighten monetary policy aggressively, which should be evident from the FOMC updated forecasts.
Monthly AUDUSD trading plan
Summing up all the above, one should be cautious with AUDUSD longs in the correction. If the price rebounds down from resistances at 0.7135, 0.7185 and 0.7245-0.726, one could consider selling the pair.
Price chart of AUDUSD in real time mode
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