The rally in the S&P 500 and the yuan continues to create tailwinds for the AUD/USD pair, while the RBA's pause in its monetary tightening cycle is weighing on the Australian dollar. Let's discuss these topics and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- Australia's weak economy is weighing on the AUD/USD pair.
- The yuan is strengthening thanks to technology exports.
- The S&P 500 continues to hit new records.
- Positive geopolitical developments suggest buying the AUD/USD pair with a target of 0.745.
Weekly Fundamental Forecast for Australian Dollar
The Australian dollar waited in vain for good news from the Middle East and ended up consolidating against the greenback. While external drivers—such as the S&P 500's record-breaking performance and the rise of the Chinese yuan—continue to support the AUD/USD rally, domestic headwinds are weighing on the pair. Following weak labor market data and slowing inflation, GDP figures also disappointed.
In the first quarter, the Australian economy expanded by a modest 0.3%, which is three times lower than the fourth-quarter result. It could have been even worse were it not for the growth in investment in AI technologies. This offset the negative impact of slowing consumer spending amid rising energy prices and the RBA's tightening of monetary policy.
Australian GDP
Source: Bloomberg.
In the minutes of its most recent meeting, when the cash rate was raised to 4.35%, the Reserve Bank expressed concern that the economy was growing above the trend. It could have reinforced inflationary pressures and encouraged the continuation of the monetary tightening cycle. However, if GDP is slowing, the RBA has every reason to take a prolonged pause.
The futures market prices in a 50% probability of a monetary policy tightening in August, and it is certain that the key rate will rise to 4.6% by year-end. Major banks believe the cycle is over, allowing them to recommend selling the AUD/NZD pair. According to Goldman Sachs, the interest rate differential between Australia and New Zealand has peaked. Barclays notes that the RBNZ has signaled that it intends to combat high inflation, which, against the backdrop of the RBA's passivity, makes the kiwi the preferred currency in the pair against its Australian counterpart.
USD/CNH Risk Reversals
Source: Bloomberg.
Other factors supporting the aussie remain in play. Since the start of the year, the Chinese yuan has strengthened by 3% against the US dollar, thanks to strong technology exports. The futures market is showing the highest conviction for USD/CNH downside since 2011. The risks of a reversal in the pair point to further appreciation of the renminbi.
AUD/USD bulls are encouraged by the US stock indices. The S&P 500's streak of gains has reached nine trading days. One more, and it will be the best winning streak since 1995. At the turn of May and June, there were five consecutive records, which has not happened since 2017. The growth in global risk appetite supports the aussie as a high-yield currency, including in carry trade operations.
Weekly AUDUSD Trading Plan
If the conflict in the Middle East does not end soon, Brent will resume its upward trend, supporting the US dollar both as a safe-haven asset and as the currency of a net exporter of energy commodities. Selling the AUD/USD pair toward 0.709 and 0.698 will become relevant. Conversely, a peace agreement between Washington and Tehran will provide a reason to buy the pair with a target of 0.745.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of AUDUSD in real time mode
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