Over the past three months, AUDUSD has been trading in a narrow range of 0.66-0.68. The bulls are trying to go ahead even despite the strengthening greenback and disappointment from China. What helps them? Let’s talk about this topic and draw up a trading plan.
Monthly Australian dollar fundamental analysis
What supports the Australian dollar? China’s economic recovery? However, weak reports on retail sales, industrial production, and investment in China mean the opposite. Is the helping hand given by the RBA keeping on raising the rates? However, a weak jobs report in Australia suggests a pause in June. Is it a strong commodity market? I won’t say it is actually strong. Although iron ore prices are rising, they are still close to a six-month low. Why don’t the AUDUSD bulls give up?
Dynamics of Australia’s labor market
Source: Bloomberg.
In my opinion, the reasons for the Aussie’s stability, which has been trading flat in the range of $0.66- $0.68 over the past three months, are the success of US stock indices. Markets started 2023 with hopes for a booming Chinese economy and pessimism about the outlook for the US stock market. The latter should have been under pressure due to the Fed’s aggressive monetary tightening. In fact, everything turned out differently.
The Chinese economy is recovering very slowly. This increases the risk of rate cuts by the PBOC. The Fed, conversely, does not rule out a rate hike. Divergence in monetary policy, according to Société Générale, may support the strengthening of the US dollar against the yuan to 7.3. This will have a negative impact on proxy currencies, including the Australian dollar.
Dynamics CNY and AUD
Source: Trading Economics
Unlike China, which disappoints investors, US stock indices are on the rise. S&P 500 has strengthened since the beginning of the year by 9%, Nasdaq Composite — by almost 22%. Yes, the era of cheap money is over, but Bank of America notes that this may be a good thing. Corporate America has shifted its focus to structural advantages — efficiency, automation, and artificial intelligence. The Bank of America raised its forecast for the broad stock index from 4000 to 4300 at the end of 2023.
After all, the Australian dollar is a risky currency. It tends to rise when the global risk appetite rises. In this regard, the success of the US stock market keeps the AUDUSD afloat. Even the rally in Treasury yields does not help the bears much. It seriously weakens such a funding currency as the Japanese yen. And carry traders actively use the situation, buying up Australian dollars.
Monthly AUDUSD trading plan
What’s next? In an optimistic scenario, the absence of a default in the US, the strength of the US economy, a further increase in global risk appetite, and an acceleration in China’s GDP could make the Aussie a Forex top performer for the rest of the year. In a negative scenario, the economic downturn in the euro area and China will eventually plunge the world into global stagflation. The main beneficiary, in this case, will be the greenback, and the AUDUSD will collapse to 0.64. I consider myself an optimist, so I will move from short-term sell trades entered at 0.6755 and 0.669 to medium-term long positions on the rebound from supports at 0.657 and 0.652.
Price chart of AUDUSD in real time mode
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