For a long time, the Australian dollar has felt confident against rising commodity market asset prices and rumors that the RBA will soon abandon its ultra-easy monetary policy. The Australian regulator did it, which created problems for AUDUSD bulls. Let’s discuss the topic and make up a trading plan.
Weekly Australian dollar fundamental analysis
It would seem that the Reserve Bank’s belated reaction to high inflation and the need to aggressively tighten monetary policy to catch up with it should make the Australian dollar a favorite in Forex. However, in reality, things are different. The decline in IMF forecasts for the global economy immediately affected the commodity market. It is worth noting that the Aussie’s competitor is so strong that it is not possible to beat its trump cards.
The hawkish stance of FOMC members, including Jerome Powell, who gave a clear signal of a hike by 50 basis points in the federal funds rate in May, forced the futures market to believe that borrowing costs would rise to 3% this year. If their growth forecast is clear, the Fed’s competitors and their currencies should take the lead. However, even Fed officials do not know to what level the US regulator will raise rates. Now everyone is talking about quickly reaching a neutral level, which does not stimulate or cool the economy. Officials believe that this will be level 2-2.5%.
In fact, before the global crisis of 2008, the level of 4% was considered neutral. Then it was lowered against the backdrop of a serious inflation slowdown. Today, consumer prices are actively rising, implying an increase in the expected level. Imagine what would happen if the Fed raised borrowing costs to 4%. The US dollar will confidently outperform all competitors. Thus, the uncertainty regarding the change in the federal funds rate remains, narrowing the yield differential between US and Australian bonds and contributing to the fall of AUDUSD.
Dynamics of AUDUSD and AU-US bond yield spread
As a rule, the massive tightening of monetary policy by the world’s leading central banks means that strong economies back them. The lowering of the IMF forecasts for global GDP from 4.4% to 3.6% for 2022 and from 3.8% to 3.6% for 2023 indicates that the global economy has problems. It was a real blow to both the commodity market and commodity currencies. At the start of the week ending April 29, futures for iron ore, a key component of Australia’s exports, fell 12% due to concerns about lower demand for commodities in China. The country is experiencing the largest COVID-19 outbreak since the start of the pandemic.
Dynamics of AUDUSD and iron ore
Despite the failures of the AUDUSD bulls over the past couple of weeks, the consensus forecast of Bloomberg experts suggests that the pair will rise to the level of 0.76 by the end of 2022. Barclays officials agree, referring to the fact that the RBA will start to catch up.
Weekly AUDUSD trading plan
It is reckless to count on a quick recovery of the Aussie when commodity prices fall. Until oil, iron ore, and other commodities start to rise, AUDUSD will remain under pressure. Strong Australian inflation data for the first quarter may be the reason for the price to rebound to 0.72 and 0.725. However, given the current commodity market conditions, use the abovementioned data to enter sales.
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.