Despite the strong economy and the tightening of the monetary policy by the RBA, the AUDUSD pair is falling rapidly. Why is this happening? How low can it fall? Let’s discuss the topic and make up a trading plan.
Monthly Australian dollar fundamental analysis
A strong economy means a strong currency. This key principle of fundamental analysis is a subject to serious challenge in 2022. Can a country’s economy be strong if the world is heading into a recession? Unemployment near a record low and continued growth in retail sales for eight months in a row shows that the Australian economy is strong. However, this did not prevent AUDUSD from falling to the lowest levels since May 2020. Thus, the pair reached the previously set short target at 0.645.
High inflation and the hope that the economy will be able to withstand the aggressive monetary tightening, allow the RBA to raise rates. According to Bloomberg experts, the cash rate will rise to 3.1% by the end of 2022 and reach a ceiling of 3.35% in the first quarter of 2023. In theory, the monetary restriction should lead to the strengthening of the national currency. However, in practice, everything is different. The RBA resembles Don Quixote fighting windmills. When the external environment is hostile, it is difficult for the Aussie not to fall.
The main drivers of the AUDUSD decline are lower commodity prices, a deterioration in global risk appetite and a significant slowdown in the economy of China, Australia’s main trading partner. The Bloomberg Commodity Spot Index, which includes a wide range of assets from oil to wheat, fell to its lowest level since the end of January. No wonder that commodity currencies are weak.
Commodity spot index dynamics
Source: Bloomberg.
Unlike currencies, backed by central banks, commodities do not have such support. They are falling due to fears about the imminent start of a global recession, which can provoke a massive increase in interest rates. The Fed plays a key role in this process. By tightening monetary policy, the US regulator contributes to the leadership of the US dollar.
At the same time, the securities markets are suffering. US stocks are turning bearish while global risk appetite is falling, as are all yielding currencies. AUD is no exception.
Aussie also suffers due to China’s problems. According to the World Bank, the Chinese economy in 2022 for the first time since 1990 will grow the slowest in Asia. The projected GDP growth is 2.8% and 5.3%, respectively.
Dynamics of the economy of China and other Asian countries
Source: Financial Times.
Monthly AUDUSD trading plan
Thus, external headwinds do not allow the Aussie to get stronger even with a strong economy and an increase in RBA rates. Commonwealth Bank of Australia expects AUDUSD to continue falling towards 0.62. Westpac experts believe that the pair will be below 0.65 for the rest of the year. In my opinion, the inability of the bulls to return prices above 0.645 is a sign of their weakness and a reason for entering sales towards 0.62 and 0.6.
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.
