The Aussie continued its grid lower as bearish pressure shows no signs of easing off just yet. After hitting a high of 0.80047 in late February, the Aussie has been unable to hold its own against the greenback.
Technical look skewed to the downside after the Aussie breached the zone of resistance at 0.74222 it held since last December, to set a fresh low for 2021 at 0.7300 in July. Since then, it has been unable to break resistance at the 0.7400 mark. the MACD and RSI indicators are also tracking lower, with RSI slipping into oversold territory, further buttressing the bearish thesis on the pair.
The weakness in the Australian Dollar does not come as a surprise to speculators. The bearish pressure on the Aussie in the last six months has been accelerated by a couple of factors. Let’s have a look at them below.
China trade stand-off
The current stand-off with China, Australia’s biggest trading partner, is hurting exports. Beijing, which sees Australia as a proxy of the West in the Pacific region, was angered by Australia’s support for an international investigation into the origin of Covid-19, which started from the Chinese province of Wuhan.
China responded with a flurry of hardline policies against Australian commodities further deteriorating the already fragile Sino-Australian relations, with ripple effects on the Aussie. The country has placed a ban on Australian coal, as the second-largest global economy seeks to reduce its dependency on coal to meet its energy needs, though many believe this has political undertones.
This has put one of the most profitable trade agreements which generates about $14bn in limbo. In December, dozens of Australian ships were refused permission to dock on Chinese ports. Chinese power plants have also been mandated to stop taking Australian coal.
Beijing has also placed restrictions on Australian wine, extending them to five years from a few months. China, the largest export market for Australian wine, placed tariffs ranging from 116% to 218% to dampen local demand. Other China-bound Australian commodities such as barley, beef, and lobster have also been placed under restriction by Beijing.
Delta variant induced lockdowns
The Delta variant is also weighing on the Aussie, as some regions have been forced to reinstate restriction measures to curb the spread of the virus. Fresh lockdowns in Melbourne, New South Wales, and Victoria have rolled back the pace of economic recovery putting further strain on a weakening Aussie.
The Department of Treasury estimates that the new wave of lockdowns would cost the nation as much as $1 billion weekly. The signs are already showing in the latest economic data. Retail sales showed weakness as sales dropped in the month of June to -1.8%, missing a consensus of -0.7% m/m. The lower-than-expected retail data sent Australian government bond yields to new lows this month as traders factored in a weak economic outlook.
RBA QE policies
The Aussie’s advances are also being restrained by the quantitative easing policies of the Reserve Bank of Australia. Last year, Australia’s central bank embarked on asset purchase and yield curve control programs when the coronavirus threatened the economy. The QE policies have pinned the yield on three-year Australian government bonds (AGB), keeping them at the same level as the cash rate. The asset purchase program focused on the 10-year yield notes has successfully speculators at bay. These two policies have eased the pedal on the Aussie’s bullish advances, especially as the RBA has reiterated its stance to keep interest rates low.
But, the Aussie has some glimmer of hope….
However, despite the somewhat gloomy macroeconomic indicators which signal a further downwind side for the Aussie, there are signs that the currency could reverse and break into a bullish run. Despite the imbroglio with China, the demand for Australian products is on the increase. Annual global coal exports increased by $9.5 billion than before the China ban.
Australian coal is gaining market share in India. barley, cotton, seafood, and timber are finding new markets while the country is looking to enter trade agreements with the European Union and the UK. This should bring some tailwinds to the AUD/USD currency pair.
Also, the current supercycle in commodities could bring more upside momentum to the Aussie. supply chain constraints, pent-up demand, and monetary policies in developed nations which have seen a stream of liquidity flowing into financial markets at low-interest rates have driven the prices of commodities higher.
Beijing a commodity currency the Aussie may be primely positioned to benefit from the cycle which experts believe would continue till 2023. This may explain why the Australian economy broke a 60-year record when the economy rose above 3% for the second consecutive quarter in Q2 2021.
Lockdowns may not be as severe as expected
Lastly, though the virus has led to a shutdown of some regions thereby extending the timeline for a return to normalcy, the vaccination roll-out is expected to taper the effects of the virus. The Reserve bank of Australia has stated that the impact of the Delta variant on the economy should be less severe than earlier estimated. As such, we could see additional gains in the Aussie when restrictions are removed as this would provide a conducive environment for pro-cyclical currencies at the expense of the greenback.
Industry watchers and speculators are anxious to see how the next months pan out for the Aussie. The currency has already made two false break-outs above the 0.7400 range signaling that it may be gathering momentum upon future consolidations.
But none is ready to fully commit to the optimism outlined in the paragraphs above. Technicals strongly indicate a further downside for this currency. Also, the US economy continues to accelerate on the back of impressive vaccination figures, this would definitely out further bearish pressure on the Aussie. If the pair fails to break resistance, then speculators should expect a further decline to 0.7240 if it breaks through the 0.7300 resistance level.