Kathryn DaviesSurging commodity prices helped the Australian dollar (AUD) to the US dollar (USD) reach a three-year high in February. However, since then the price has fallen.
In this article, we look at the current trends, news, some of the factors that have been driving the pair and analysts’ latest AUD/USD outlook.
How has AUD/USD been performing since the pandemic started?
AUD/USD dropped sharply as the pandemic hit both Australia and the US. Investors fretted over the impact of lockdown restrictions on the global economy. The Australian dollar, also known as the Aussie, weakened, while the US dollar strengthened, sending the pair to a low of 0.5510 in mid-March 2020.
The Aussie rebounded off that low and rallied higher across the remainder of 2020, kicking off 2021 at 0.77 and rising to a three-year high of 0.8006 in February. However, since then the Aussie has underperformed the USD and the pair has fallen steadily across the year, reaching a low of 0.7103 on 21 August. The latest AUD to USD news saw an attempted rebound, with a rise to 0.7550 in late October before once again trending below 0.73.
Why has the Aussie been falling?
The Australian dollar’s recovery from the pandemic low was aided by surging commodity prices. Copper and iron ore are key Australian exports – copper prices rallied to a 10-year high at the start of the year, helping to lift the Aussie.
This chart shows the copper price rising in tandem with AUD/USD at the start of the year. However, even as copper prices remained high, the Aussie fell lower as the year progressed.
The Australian dollar started to come under pressure in June as Covid-19 cases in Australia increased and lockdown restrictions were once again imposed in parts of the country’s largest cities. The lockdown disrupted what had been a strong recovery in the economy and the closely monitored labour market.
While Covid restrictions have now eased, the labour market is expected to take time to recover. Australia’s labour market report for October was disappointing and reflective of earlier lockdowns. According to the Australian Bureau of Statistics, unemployment surged to 5.2%, up from 4.8%, while total employment declined by 46,300.
However, with vaccination rates rising in New South Wales and Victoria, the two largest states, the road to re-opening is underway and employment could start to rise in the coming months.
Meanwhile, inflation in Australia was 3.0% in the year to September, significantly lower than inflation in other western countries such as the US or UK. The Reserve Bank of Australia (RBA) attributes the softer inflation in part to strong labour supply, which has meant that there has been less upward pressure on wages.
In the minutes following the November RBA meeting, policy makers pushed back on the likelihood of an interest rate rise in 2022, signalling that conditions for a rate rise may not be met until 2024, given that inflation and wage growth were lower than in other advanced economies.
Looking beyond central bank policy, the Aussie is also considered a proxy for China, given that Chinese exports account for over 30% of total Australian exports. Economic growth in China has shown signs of slowing across recent months, which could be adding pressure to the Aussie.
Why has the USD been strengthening?
The US dollar has been strengthening against the Australian dollar and other major peers as expectations grow that the US Federal Reserve will start to raise interest rates sooner rather than later.
In November’s Federal Reserve meeting, the US central bank announced it would start reining in monetary policy support. The Fed started to taper its $120bn monthly bond purchases by $15bn a month. The move was expected by the market. However, the Fed also sounded cautious regarding any interest rate rise, sticking with its belief that the rise in inflation is transitory.
However, the markets are not so convinced. Inflation, as measured by consumer prices, jumped to 6.2% year-on-year in October, the quickest rise in 30 years. Core inflation, which strips out the more volatile items of food and fuel, rose 4%. This is double the Fed’s 2% target level.
As with the RBA, the labour market is a key area of interest for the Fed. The latest non-farm payroll data revealed that the US saw 531k jobs added in October. September’s data were also upwardly revised to 312k. The unemployment rate fell to 4.6% from 4.8%.
An improving labour market and October’s inflation report have added to the feeling that the Fed could move sooner to raise interest rates. As a result, the USD has strengthened, rising to a 16-month high against a basket of currencies.
AUD/USD technical analysis
AUD/USD has been trending lower since late February. It trades below its multi-month descending trendline.
After rebounding off 0.7106, the recovery faced rejection at the rising trendline and 200-day simple moving average (SMA). Failure to take the 200-day SMA below the 50-day SMA and a bearish relative strength index (RSI) suggest that there could be more losses ahead.
Any recovery would need to retake the 50-day SMA at 0.7350. However, it would take a move over the 200-day SMA at 0.7535 for buyers to gain traction.
Meanwhile, sellers could be looking for a move below 0.7172, the September low, to target 0.71, the August low, and fresh yearly lows.
AUD/USD forecast: where do the experts see AUD/USD heading?
In their AUD/USD analysis, analysts at ING see head and tailwinds for the Aussie in 2022, noting: “The RBA dropped its yield-curve-control policy in November but has retained dovish forward guidance to 2024. The lockdown-induced period of soft data should not last much longer and a 70% vaccination rate reduces the risk of new restrictions. We expect a solid rebound in unemployment and while a sharp rise in wage growth is not guaranteed, inflation should remain within the 2 to 3% RBA target in 2022. The growth outlook is blurrier as many headwinds may come from China.
ING analysts’ AUD to USD forecast is for the pair to finish the year at 0.73 before falling to 0.73 in Q1 2022, and going on to trend higher to 0.74 in Q2 2022 and up to 0.75 at the end of the year.
Analysts at Citibank are bullish regarding the outlook for the USD, saying: “Key outlooks for the USD remain positive for the USD going into end of year, supported by rising inflation, and an accommodative stance from the Federal Reserve to be reactive to data with regards to future rate hikes going into early 2022.”
The Citibank’s AUD to USD price prediction is for the pair to rise towards 0.73 over the coming three months before falling towards 0.71 over the coming 6 to 12 months.
Fion Cincotta, senior market analyst at City Index, considers that the AUD/USD could have more downside to come before stabilising. In a note to Capital.com, she said:
Meanwhile, at the time of writing (18 November), the algorithm-based forecast website Wallet Investor predicted that AUD/USD could strengthen over the coming years. The AUD/USD rate was forecast to edge higher to end 2021 at 0.7357. The website’s AUD to USD long-term forecast suggested the pair could rise to close 2022 at 0.7577, 2023 at 0.7791, 2024 at 0.8012 and 2025 at 0.8228.
It is worth keeping in mind that both analysts and online forecasting sites can and do get their predictions wrong. We always recommend that you do your own research and consider the latest market trends and news, technical and fundamental analysis, and expert opinion before making any investment decisions. Keep in mind that price performance is not a guarantee of future returns. And never invest more money than you can afford to lose.
FAQs
Read more: GBP/AUD forecast: Time for consolidation
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You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
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