The main forecast for the Australian dollar: a bear
- Australian dollar slowed down his wider lineage but is still vulnerable
- Poor RBA, growing Covid cases, Beijing repression threatens AUD
- Softer US non-farm payroll data could alleviate the situation AUD / USD
The Australian dollar spent most of its time slowly against its main counterparts last week, but progress has been rather weak. For AUD /USD however, this meant a significant break at the peak, where prices have fallen by more than 7.5% since February. The underlying dynamics are undermining the outlook and the Aussie is likely to have a rough road ahead in the coming week.
All eyes are on the Reserve Bank of Australia’s (RBA) interest rate decision, where the central bank is likely to keep key instrument settings unchanged. The RBA cut some bond purchases at its last meeting, but the recent surge in local Covid cases in the midst of a highly contagious Delta variant could hamper growth prospects. If it means a poorer central bank for longer, the Australian dollar could be vulnerable.
This is as Australia’s New South Wales reported record cases health experts noting that closures may be longer here. Sydney may re-impose restrictions in cases of urgency. Moreover, it is not only isolated in Australia, but in parts of the Asia-Pacific region, North America and Europe. If foreclosures threaten global growth, the Australian dollar in commodities could be vulnerable.
RBA Governor Philip Lowe will testify before a parliamentary committee at the end of the week. If it reiterates those short-term risks that could potentially lower Australian government bond yields, this could exacerbate Aussie’s weakness. In fact, the AUD / USD has been closely following the decline in Australian bonds and Chinese equities since then – see chart below.
The repression of Beijing against the technology and education sectors has caused panic, leading many investors to liquidate their positions in Chinese and Hong Kong equities. As profitability is increasingly threatened, it could slow growth in the world’s second largest economy. China is just such Australia’s largest trading partner, and a slowdown in the former could risk the latter.
The week also ends with US non-farm payroll data, and the world’s largest economy is expected to add 925,000 jobs in July, up from 850,000 earlier. The unemployment rate should also fall to 5.6% from 5.9%. Economists are now ostensibly overestimation the health and vitality of the economy by opening the door to a disappointing publication. If this further displaces the Fed’s narrowing stakes, AUD / USD could see strength.
AUD / USD versus US Dollar Index, CSI 300 and Australian 10-Year Government Bond Yields
– Written by Daniel Dubrovsky, DailyFX.com strategist
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