The Fed’s policy and the unwillingness of both Washington and Beijing to make concessions send AUD/USD down

The Australian dollar has recovered due to the rumours about the U.S.-China negotiations and the Reuters report about Donald Trump’s criticism of the Fed’s policy. Trade wars and higher borrowing costs in the USA are the major troubles for AUDUSD bulls. Therefore, the hopes for easing the conflict between the two global largest economies and a slowdown in the Fed’s monetary restriction cycle encouraged the AUD fans to go ahead.

The AUDUSD pair has been 9.5% down from the January’s highs, the bearish sentiments is dominating in the market. There is hardly anyone, who isn’t projecting the Australian dollar to crash. National Australia Bank expects it to be at $o.69 amid the increased volatility and a continuous fall of the commodity prices. According to Rakuten Securities, AUDUSD, on the long-term scope, can drop down to $0.6. The main problem is a decline in Chinese economy’s growth, which cover one third of the Australian exports, which is equal to 8% of Australian GDP.

Dynamics of Australia’s exports

Source: Bloomberg

The evidence that investors are based on the Fear of China’s GDP decline, rather than the Greed due to the Australia’s economic growth, is that a very close correlation between the Australian dollar and the offshore yuan. Yes, the GDP growth is speeding up; yes the Australia’s unemployment rate is going down towards 5% (the level, according to the RBA, which corresponds to the full employment); yes, Australia has had the budget surplus for the first time for decades; yes, Australia’s export is strong; but all of that is bet by the strong wind from Asia.

Dynamics of Australian dollar’s correlation with yuan

Source: Bloomberg

Another thing that troubles AUDUSD bulls is the Fed’s monetary normalization. During a long period of time, the Australian bond yields were ahead their U.S. peers. Amid the increase in the global risk appetite and low volatility, carry traders were able to implement own strategies and the demand for Australian dollar remained high. It was relevant in 2017, and so “Aussie” reached the highest levels against the U.S. dollar for two and a half years. In 2018, the things have changed. The Treasury yield has surged on the hopes for the Fed’s aggressive monetary normalization; the spread has shifted in the favour of Treasuries and speculators started exiting the trades, making the “Aussie” the main G10 outsider.

The Reserve Bank of Australia doesn’t conceal that it is happy with its local currency devaluation and believes that AUD deeper drop will support Australian economy. According to Philip Lowe, the Fed may hike its rate faster than the market expects, which will increase the U.S. inflation rate and as well as the employment in Australia. It is obviously about positive influence of the weaker local currency on export and the related indicators.

I, personally, suppose that the U.S.-China trade war talks will hardly succeed. But the matter of how the Fed will respond to Donald Trump’s criticism is still crucial for the AUDUSD outlook. If the AUD bulls won’t drive the rate above 0.74, it will prove their weakness.

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Price chart of AUDUSD in real time mode

Two Troubles of Australian dollar

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. 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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