The RBA meeting must have supported the AUDUSD bulls. Despite the lockdown in Sydney, the Australian central bank is not willing to abandon the monetary normalization. Will it become a unique example? Let us discuss the Forex outlook and make up a trading plan.
Monthly Australian dollar fundamental forecast
History repeats itself and often rhymes. At the end of July, the US dollar speculative longs reached the highest level since March 2020. The exiting of buy trades amid the lack of Jerome Powell’s signals about a soon tapering of the QE has significantly weakened the greenback. Soon after, the Australian dollar has surged amid the news that the RBA is about to scale back the monetary stimulus. By this time, hedge funds have boosted the Aussie shorts to the highest levels since March 2020.
The actions of both central banks surprised the market majority. Ahead of the RBA meeting, 13 of 18 Bloomberg experts predicted that the central bank would abandon a plan to trim purchases of government bonds to AU$4 billion a week from September, from the current weekly pace of AU$5 billion. Westpac even expected an increase in the QE pace to AU $6 billion per week. According to the company, due to the increase in the number of COVID-19 cases and lockdowns in Sydney, Australia’s economy will face a W-shaped recovery; the labor market will lose 200,000 — 300,000 jobs, and the unemployment rate will rise from 4.9% to 5.7%.
Dynamics of consumer confidence and number of COVID-19 cases in Australia
Sydney plays an important part in Australia’s economy. It accounts for about 25% of Australia’s GDP and 22% of employment. The city’s isolation significantly raises the risks of a second recession, but the RBA chose not to make any sudden moves. Once coronavirus outbreaks are contained, the economy rebounds quickly, with significant government support and vaccination programs giving a reason for optimism, Philip Lowe said. The weekly QE pace will be reduced from September, as planned, from AU $5 billion to AU $4 billion. The Reserve Bank still does not expect the cash rate to increase before 2024.
The AUDUSD bulls seem to be encouraged, but the things are not as bright as they look. Unlike the previous global recession, when the explosive growth of China’s GDP and iron ore prices allowed the Aussies to reach parity with the greenback, this time the commodity market alone cannot support the Australian dollar. The deteriorating epidemiological situation and fears of a soon economic downturn are not the only AUD bearish drivers.
COVID-19 is coming back to China, its economy is slowing down, as evidenced by the decline in China’s Caixin manufacturing PMI to a 15-month low. Tense diplomatic relations between Canberra and Beijing are further exacerbating the situation. In addition, amid the growing popularity of the yuan, which already accounts for 4.3% of daily Forex trading, the Australian dollar has become less attractive as a proxy for Chinese growth.
Monthly AUDUSD trading plan
In my opinion, the main risk factor for the Aussie at the end of the summer will be the correction of the US stock indexes amid problems with the government debt ceiling and the active withdrawal of liquidity from the market through the Fed reverse repo transactions. As a result, the AUDUSD should continue falling in value. It will be reasonable to sell the pair on the rise towards 0.74, 0.7425 and 0.7485 or on the breakout of the support at 0.733. I suggest the downside target at 0.722.