Problems in the Chinese economy and capital flowing back from Australia to the US as AI demand rebounds are pressuring AUD/USD. Moreover, expectations for RBA rate hikes appear overstated. Let’s discuss this topic and outline a trading plan for AUD/USD.
The article covers the following subjects:
Major Takeaways
- Australia is ready to raise rates.
- The S&P 500’s stabilization isn’t helping AUD/USD.
- Bad news from China is weighing on the Aussie.
- Short trades on AUD/USD with targets at 0.69 and 0.68 remain relevant.
Weekly Fundamental Forecast for Australian Dollar
Central banks have different views on how the oil crisis will affect domestic prices. While the US, the eurozone, Japan, and Norway are raising rates, the UK, Switzerland, and Sweden prefer to keep them unchanged. Some central banks are acting early, while others are taking a cautious approach. The Reserve Bank of Australia belongs to the first group. However, the futures market is pricing in a 90% probability of a cash rate hike at the September 29 meeting, but even this is not enough to stop AUD/USD from falling sharply. And this is far from the Aussie’s only paradox.
Every Bloomberg expert expects the key rate to rise from 4.35% to 4.6%, its highest level since 2011. In their view, the RBA has run out of patience with high energy prices. Despite mixed economic data, central bank officials have maintained a hawkish tone. Even the rise in unemployment to 4.6% has not changed their stance.
Central Bank Interest Rate Trends
Source: Bloomberg.
If you had traded AUD/USD based on the different pace of monetary tightening, losses would have been inevitable. Not only is the Reserve Bank ready to raise rates as early as tomorrow, but the futures market also expects the cash rate to peak at 5.25%, 90 basis points above its current level. However, the RBA may not go that far. Further monetary tightening would deal another blow to the housing sector and slow household consumption. The Australian economy may simply be unable to withstand such pressure, unlike the US economy.
Previously, the Australian dollar closely followed US stock indices and behaved like a risk-sensitive currency. However, AUDUSD is now falling despite the S&P 500 rally. In my view, artificial intelligence may explain this paradox. Weaker demand for AI in the US led to capital flows into Australia. Once demand recovered, capital began flowing in the opposite direction.
Real Retail Sales Trends
Source: Wall Street Journal.
The only traditional AUDUSD driver that still works is the yuan. The renminbi is weakening and pulling the Aussie down. At first glance, this may seem illogical, as Xi Jinping reportedly spoke with Donald Trump from a position of strength. However, the picture becomes clearer when we consider declining real retail sales and falling investment in most sectors, with AI being a notable exception.
China’s economy looks like a paper tiger, propped up by questionable official statistics and exports. The latter could easily come under pressure from the US.
Weekly Trading Plan for AUD/USD
In my view, only a combination of a cash rate hike to 4.6% and signals from the Reserve Bank of Australia that it will continue its monetary tightening cycle in November can save AUD/USD. If the RBA gives no such signals, the pair will likely continue to decline, making short positions with targets at 0.69 and 0.68 relevant.
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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