The Australian economy is to face a downturn amid new lockdowns and a collapse in iron ore prices. Furthermore, the AUDUSD bulls are set back by the problems delivered by the Fed and China. Let us discuss the forex outlooks and make up a trading plan.
Monthly Australian dollar fundamental forecast
The problems currently challenging Australia’s economy do not allow the AUDUSD bulls to reverse the downtrend. The world’s stock indexes are down, the topic of trade wars is again hot, investors worry about the risks of China’s Evergrande default. Therefore, the AUDUSD is naturally down to the targets at 0.728 and 0.722, defined in the previous analytics, and could fall deeper.
The main headwinds for the Aussie come not from the US, where the Fed is to signal the start of monetary policy normalization, but from Asia. Pressure from China and the risks of a slowdown in its economy send the Australian dollar down as a proxy for the Chinese economy.
Australia is torn between two partners. The US is Australia’s main military partner, and China is its main trade partner. In response to the creation of Aukus by Washington, Canberra, and London, Beijing asks for the Trans-Pacific Partnership and declares that it seeks economic cooperation, unlike the USA and Australia, which insist on war and destruction. Therefore, Australia’s economy seems to be in trouble.
A new round of trade wars between the USA and China and between China and Australia is not what the Australian economy will benefit from. Australia’s growth is to face a downturn amid new lockdowns and a drop in commodity prices, including iron ore. The first sign of a recession was the drop in Australian employment by 146,000 in August against the forecast of -90,000.
Dynamics of Australia’s employment
Source: Trading Economics
Potential default by Evergrande only worsens the situation. The largest developer in China missed payments to its creditors on September 20 but promised to pay debts on bonds on the 23rd. Markets reacted with growth, including growth in AUDUSD, but the coupons may not be redeemed. MUFG believes that investors may find themselves jumping out of the frying pan into the fire.
China’s real estate sector accounts for about 29% of GDP, and Beijing now faces the fallout of the impact of China’s financial system on developers, tech, and other companies. This gives the BofA reason to downgrade its forecasts for China’s growth from 8.3% to 8% in 2021 and from 6.2% to 5.3% in 2022. The main reasons are the outbreak of COVID-19, tight credit control over investments in infrastructure and the real estate sector, as well as decarbonization policies that press down the production of commodities. According to Market Securities, Chinese GDP will slow down sharply (+ 0.3% Q-o-Q) in the third quarter, significantly lower than Bloomberg experts’ median estimate at + 1.1%.
Dynamics of China’s GDP
Monthly AUDUSD trading plan
Thus, even if the Fed does not change its rate forecasts at its September meeting and does not announce the tapering of the QE, the AUDUSD upward correction will be temporary. It is relevant to sell the pair. The targets at 0.728 and 0.722 have been reached; the next downside target is 0.714.
Price chart of AUDUSD in real time mode
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