If AUD/USD bulls aren’t stopped by the Reserve Bank, they will be set back by trade wars and divergence in monetary policy

No matter how often traders are advised to stay away from falling daggers, many of them are still willing. To enter at the very start of a new trend- isn’t it a dream? Something like this is featured by the Australian dollar. The second, after the Swedish Krona, worst G10 currency since early 2018, seems to have hit the bottom and surged on the news about potential easing of the US-China trade battle. However, the end of the US trade war with China doesn’t seem to be soon; and the RBA has every reason to keep the interest rate steady. If so, the AUDUSD rally can well turn out to be the last breath.

The Aussies is about 8% down to its US peer because of higher borrowing costs in the USA, and growing probability of a decline in China’s economy, which will result in the sales of risky assets. Although the IMF suggests positive outlook for the Australian GDP in 2018 (+3.2%), close cooperation between Beijing and Canberra has encouraged traders to sell AUDUSD during the past few months.

Dynamics of AUD/USD and speculative positions for the Australian dollar

Source: Bloomberg

Even if the People’s Bank of China claims the Chinese economy not to be affected by trade wars, and the researches by large banks suggest that the US tariffs will make the China’s GDP lose just 0.2-0.3 bps; the drops of the yuan, Shanghai Composite and the PMI suppose something different. Investors have already priced into the quotes most of the negative. Therefore, it becomes clear why the AUDUSD pair has surged amid positive news. Donald Trump’s statement about a long talk with Xi Jinping pushed the Aussie up to its monthly highs. China is not only the largest consumer market for Australia, it also takes part in pricing.

The Australian dollar has been supported by the recovery of the US stock indexes, following the drop in October, and the increase in the Australian trade surplus up to AU$3.02 billion, the widest since February, 2017. AUD devaluing supports exporters, but it doesn’t result in faster import prices increase (+1.9% in September, compared to +3.2% in August) or the higher inflation rate (+1.9% in the third quarter, compared to 2.1% in the second one). So, RBA has strong reasons to put off hiking the cash rate. The situation is worsened by a decline in the Australian property prices. In this environment, consumers usually try to save more and spend less, which results in lower CPI and GDP rates. Therefore, none of 23 Bloomberg experts expects the Reserve Bank of Australia to raise the interest rate on November 6; and the derivative markets expects the cash rate to remain at 1.5% at least through the middle of 2020.

I, personally, believe that AUDUSD may be corrected up to 0.728 and 0.744, driven by the hopes for a successful settlement of the US – China trade conflict, ahead the meeting of Donald Trump and Xi Jinping, as well as by the stabilizing of the US stock indexes. Nevertheless, the AUD middle-term outlook is bearish, so it can be sold on the rise.

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Price chart of AUDUSD in real time mode

Will RBA Put Aussie in Straitjacket?

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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