Aussie: victim of circumstance. Forecast as of 09.05.2022

No matter how bullish the RBA monetary tightening started for the AUDUSD, serious headwinds do not allow the pair to rise. Let’s discuss the topic and make up a trading plan.

Monthly Australian dollar fundamental analysis

Time has shown who is right and who is wrong. Ahead of the RBA and Fed meetings, hedge funds switched to AUD net long trades for the first time since August 2021, while asset managers doubled their net shorts to 33,000 contracts. Hedge funds expected the start of the RBA monetary restriction and the closing of greenback long trades after the federal funds rate hike by 50 basis points. Asset managers have decided that the USD strength was not in danger. As a result, those who had stronger nerves succeeded.

Dynamics of AUDUSD and AUD hedge funds


Source: Bloomberg.

The RBA surprised investors by raising the cash rate from 0.1% to 0.35%, while most Bloomberg experts predicted that the rate would rise by only ten basis points. Philip Lowe looked embarrassed after arguing that the cash rate would remain at the same level until 2024. However, the longer the central bank sticks to its wait-and-see approach, the faster it will have to catch up with rising inflation. 

Indeed, with consumer prices jumping to 5.1% in the first quarter and core inflation to 3.7%, exceeding the upper end of the 2-3% target range, the Reserve Bank of Australia can’t remain dovish. According to the updated forecasts, the RBA expects core CPI to accelerate to 4.6% by the end of 2022 and return to the target only in 2024. This circumstance suggests a long period of RBA monetary tightening. The futures market is signaling an increase in the cash rate to 0.6% by June and to 2.75% by Christmas. This is faster than RBA forecasts of 1.75% by the end of 2022 and 2.5% by mid-2023.

AUD is strongly supported by the central bank and strong macroeconomic Australian data, including the growth of retail sales to a record level for three months in a row. However, the AUDUSD bulls face headwinds, causing the pair to fall. The Aussie has been the victim of deteriorating global risk appetite and fears of a global economic slowdown. The dependence of the AUD on the US stock market is proved by the high volatility of the S&P 500 and AUDUSD after the FOMC meeting. The risks of a further decline in the stock index do not allow AUD buyers to catch their breath.

Each of the three drivers of global economic growth has its challenges. The US is coping with the Fed’s aggressive monetary tightening. The eurozone is suffering from the war in Ukraine and the energy crisis, and China is struggling with the COVID-19 outbreak. Chinese Prime Minister Li Keqiang’s warning about a difficult employment situation due to lockdowns in Shanghai and Beijing and weak data on the Chinese trade balance only contributed to the AUDUSD decline.

Dynamics of China’s trade balance


Source: Bloomberg.

Weekly AUDUSD trading plan

I don’t see any dramatic changes in Asia or Eastern Europe so far, which indicates a continuation of the AUDUSD downtrend towards 0.685 and 0.675. I recommend entering 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.

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