The lower the expectations, the greater the effect of good news. Although the lack of large-scale fiscal stimulus in Beijing has discouraged the AUDUSD bulls, they do not lose hope. Let’s talk about this topic and draw up a trading plan.
Weekly Australian dollar fundamental analysis
At the beginning of the year, the AUDUSD bulls were quite ambitious. Bets on China’s booming economic recovery, a slowdown in the Fed’s monetary tightening pace, and hopes for a continuation of the RBA’s rate hiking made the Aussie the best performer among G10 currencies. However, the AUD crashed in February, and only in March did the Australian dollar manage to strengthen.
The modest growth of Chinese retail sales by 3.5% and industrial production by 2.4% in January-February was another sign of the uneven recovery of the Chinese economy. Prior to this, the PMI was strong, while consumer prices featured the worst performance in a year. There can be no weak inflation in a strong economy! Consumers remain wary, which is pressing down the yuan proxies, such as the Australian dollar and the New Zealand dollar.
Dynamics of China’s retail sales and industrial production
Source: Bloomberg.
Mixed domestic data in Australia made the RBA less aggressive than in February. The regulator has raised the interest rate for the tenth time in a row, and it reached 3.6%. But the accompanying statement contained the idea that monetary tightening is expected to be required. It was regarded by investors as more neutral compared to the statement that further rate hikes were expected in February.
Philip Lowe noted that how much and when it is necessary to raise the interest rate will depend on the incoming data on business confidence, the labor market, inflation, and retail sales. Markets immediately seized on the idea of a possible end of the monetary tightening cycle as early as April. Derivatives signal that by the next meeting, the rate will be 3.67%, which is only 7 basis points above its current level. The rate ceiling is estimated at 3.85%, although a week ago, it was about 4.1%.
Of course, market expectations for the interest rate were affected by the bankruptcy of the US SNB, which forced the yield on 10-year Australian bonds to fall below the RBA interest rate.
Dynamics of Australian bond yields and RBA interest rate
Source: Bloomberg.
At the same time, the panic in the US financial markets turned out to be much more significant than in the Australian ones, which widened the yield spreads and contributed to the AUDUSD strengthening.
I believe the Aussie has not lost its benefits and will use them in the future. Yes, the hopes for China’s booming economic recovery quickly fade amid the lack of large-scale fiscal stimulus in Beijing. After all, the lower the expectations, the greater the effect of good news. The same goes for the Reserve Bank of Australia. If Australia’s jobs report is strong, the idea of a rate hike in April will return to the market.
Weekly AUDUSD trading plan
Nonetheless, the AUDUSD bulls should be cautious and consider the risks of the Fed’s aggressive monetary tightening. It is relevant to buy the pair above 0.6715-0.6725.
Price chart of AUDUSD in real time mode
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