2023.08.22 2023.08.22
Aussie: Hope dies last. Forecast as of 22.08.2023Dmitri Demidenkohttps://www.litefinance.org/blog/authors/dmitri-demidenko/
The AUDUSD has dropped dramatically and will hardly recover soon. However, the AUD bulls might have a chance. Let us discuss the Forex outlook and make up an AUDUSD trading plan.
Monthly Australian dollar fundamental analysis
The Australian dollar is perhaps the biggest disappointment of 2023 in the Forex market. It started off successfully thanks to hopes for a rapid Chinese economic recovery after the pandemic; it used to be the G10 best performer for some time but turned into a clear outsider in the third quarter. The Chinese economic recovery doesn’t proceed fast, and the yuan and its proxy currencies suffer from this.
Hope is the last to die for hedge funds, and they still hold on to AUD longs. Nonetheless, asset managers have said goodbye to illusions and have long been holding shorts. In the week ended August 15, the AUD shorts reached record levels.
Dynamics of AUDUSD and AUS speculative positions
Source: Bloomberg.
The main drivers of the AUDUSD downtrend are divergences in the economic growth of the US and China, as well as differences in the monetary policy of the Fed and the People’s Bank of China. Another AUD bearish driver is the cooling of the Australian economy and the expectations of the RBA monetary tightening completion. After an unexpected rise in unemployment to 3.7% and a decrease in employment by 14,600 in July, the derivatives market is betting on the third consecutive maintaining of the cash rate at 4.1% in September.
The RBA’s 12 rate hikes are a thing of the past. At the previous meeting, the central bank erected high barriers to further increases in borrowing costs. In the USA, the monetary tightening cycle is also expected to end. Still, the strength of the US economy, large-scale bond issuance by the Treasury, and the Fed QT are the reason for Treasury yields to grow faster than their Australian peers. The AUDUSD downtrend is supported by the widening spread between the bond yields in the USA and Australia.
For the yuan, the situation is even worse. The weakness of the Chinese economy is forcing the People’s Bank of China to cut rates. This widens the yield spread of treasuries and their Chinese peers to the highest levels since 2006, pushing the USDCNH to multi-month highs. Official Beijing’s attempt to protect its own currency with the help of the yuan rate fixing does have any results.
Dynamics of yuan and its rate fixing peculiarities
Source: Bloomberg.
The AUDUSD is also pressed down by the correction of US stock indices, which is interpreted by investors as a deterioration in global risk appetite and encourages traders to sell off risky assets, including the Australian dollar. Aussie needs good news from Asia and North America to recover. There isn’t any as of now, so the AUD is going down.
Monthly AUDUSD trading plan
In my opinion, the only thing that can support the AUDUSD bulls is the worsening macro statistics in the US domestic data. In this scenario, the Treasury yield will fall, US stock indices will rise, and the US dollar will weaken. As for the Chinese economy, Beijing’s intention to support the yuan and achieve 5% GDP growth in 2023, by all means, should create a tailwind for the Aussie. Until the pair goes above 0.652, the bearish trend will continue. If the AUDUSD breaks out the indicated level and goes higher, one could enter medium-term purchases.
Price chart of AUDUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
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