Aussie: too early to act boldly. Forecast as of 02.05.2022


The AUDUSD‘s decline by almost 8% compared to April highs suprised Aussie buyers. They counted on the pair’s growth on the expectations of the monetary restriction by the RBA. Let’s discuss the topic and make up a trading plan.

Weekly Australian dollar fundamental analysis

Everything is possible in Forex. Even the AUD drop, though the RBA is ready to raise rates for the first time since 2010. It is worth noting that the AU-US local bonds yield gap is widening, the labor market is close to full employment, and inflation has reached its highest level in 21 years. AUD despite internal positive data is not able to deal with negative external factors.

18 out of 21 Bloomberg experts expect the RBA to raise the cash rate for the first time in more than twenty years at its May 3 meeting. 13 economists predict that the rate will rise by 15 basis points to 0.25%. Five experts expect it to reach 0.5%. One of the constraints is the proximity of the parliamentary elections on May 21. The last time the RBA tightened monetary policy was during the election campaign in 2007 when Prime Minister John Howard lost.

The highest inflation in more than two decades and a strong labor market bring the start of monetary restriction closer. The futures market expects it to be the most aggressive since 1994. According to overnight index swaps, the cash rate in 2022 will rise from 0.1% to 2.5%, which implies its increase by 50 basis points, at least at one of the bank meetings.

Dynamics of cash rate expectations

Source: Bloomberg.

Alas, neither strong data nor expectations of an aggressive tightening of the RBA’s monetary policy are helping the AUDUSD bulls. AUD has a very strong competitor. The greenback tends to strengthen against major currencies when the US economy outperforms its global counterpart, confirming US exceptionalism or when demand for safe-haven assets is high. Both factors are now in force. Despite the decline in US GDP by 1.4% in the first quarter, the indicator is expected to recover rapidly in the second. Against the backdrop of PCE’s acceleration to 6.6%, this fact unties the Fed’s hands. The central bank can bring the federal funds rate to 3% in 2022 and intends to reduce the nearly $9 trillion balance sheet significantly.

Dynamics of the Fed’s rate and balance sheet

  

Source: Bloomberg.

A strong competitor is not the only reason for the AUDUSD‘s nearly 8% decline from its April highs. The biggest COVID-19 outbreak in China since the start of the pandemic is putting pressure on the Australian dollar. On the one hand, it slows down the Chinese economy. On the other hand, it leads to a fall in commodity prices. In April, Chinese business activity in the manufacturing industry fell from 49.5 to 47.4, which confirms serious GDP problems.

Weekly AUDUSD trading plan

In my opinion, the negative factors from China and the commodity market, as well as the proximity of the FOMC meeting, hinder AUDUSD grow. It is possible to add up to shorts, formed after the price rebound towards 0.72 following the release of the Australian inflation data, if the RBA raises the cash rate by 15 basis points or refrains from starting monetary restrictions. The next day, take profits at the end of the Fed meeting.

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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