Aussie correlates with stocks. Forecast as of 12.04.2022

The Fed’s intention to aggressively wind up the balance sheet has created problems for the leader of the G10 currencies, the Australian dollar. AUDUSD buyers retreated, but does the current correction mean they have given up? Let’s discuss the topic and make up a trading plan.

Weekly Australian dollar fundamental analysis

Until the first days of April, the AUD market was dominated by greed, but after April 5, it was replaced by fear. Hedge funds and other speculators began exiting AUDUSD long trades amid hawkish statements by Lael Brainard and the subsequent release of the minutes of the March FOMC meeting. In both cases, investors were scared by talks of an aggressive wind up of the Fed’s balance sheet, which immediately affected equity markets. Aussie endured the situation with treasuries amid the intention of the RBA to move from a policy of patience to monetary restriction. However, the fall of the S&P 500 upset the AUDUSD bulls.

It is generally accepted that the main drivers of the AUD rally in January-April were a strong commodity market and a change in the RBA’s outlook. The Australian regulator previously expected to wait out high inflation and then decided to fight it. After the April RBA meeting, derivatives increased the chances of a cash rate hike in May to 57%. It is also predicted that the cash rate will rise from 0.1% to 2% by the end of the year.

The boom in the commodity market has led to an increase in the Aussie’s correlation with the Australian ASX 200 stock index to the highest level since 2011. Mining companies have a significant share in the structure of the Australian stock market, so the improvement in correlation looks natural. At the same time, the Australian stock market, like others, is sensitive to the dynamics of the S&P 500. In this regard, fears that the Fed will not bail out US stocks affected the US securities market first and then the Aussie. The ASX 200 correction was one of the reasons for the AUDUSD correction.

Dynamics of the AUDUSD and ASX 200 correlation

Source: Bloomberg.

Even though the fight against inflation is the Fed’s top priority, the regulator will still assess the situation in the markets. The Fed will keep raising rates as long as the S&P 500 can bear it. A strong US economy, low real yields on Treasury bonds, strong corporate reporting, and history show that the Fed is not worth fearing. Most likely, the regulator will be able to ensure that the US avoids recession, which will have a positive impact on the US and the Australian stock market. The current correction in these markets is a reason to enter purchases, including AUD.

Aussie buyers should not fear a slowdown in China’s GDP due to the COVID-19 outbreak. The country usually achieves the goals set by official Beijing. Therefore, the slowdown in economic growth is a reason to rely on financial incentives. As for the derivatives market, it will take a long time to recover against the backdrop of the restructuring of markets associated with the displacement of Russia. Prices will remain high, which makes the chances of a resumption of the AUD rally high.

Weekly AUDUSD trading plan

These factors allow me to assume that the AUDUSD pair is currently in a correction. It is relevant to enter long trades when the price rebounds from the supports at 0.739 and 0.731 and in case of its return above the resistances at 0.746 and 0.7495.

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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