Australian dollar woes continue
The Australian dollar has extended its downswing, posting sharp losses on Friday. Currently, AUD/USD is trading at 0.7135, down 0.74% on the day. It is not looking pretty for the currency, which is having another week to forget. AUD/USD is down 1.34% this week and November has been ugly, with the currency losing 5.11% this month.
The emergence of a variant of Covid-19 in South Africa is causing jitters in the financial markets. We’re seeing a risk-off, flight to safety by investors, with risk currencies like the Australian dollar taking a beating. An excellent reading from Australian Retail Sales for October has not been enough to stop the Aussie’s slide. Retail Sales jumped 4.9% in October m/m, as the reopenings in New South Wales and Victoria resulted in a consumer spending spree.
The Australian dollar is also under pressure as the Federal Reserve is expected to accelerate tapering of its pandemic bond purchase programme. Goldman Sachs said in a note on Thursday that it expects to Fed to double its taper trim from USD 15 billion to USD 30 billion each month, starting in January. This means that the programme will be wound up by March instead of June. An earlier timeline means that the Fed can look at raising rates sooner, which is bullish for the US dollar.
We continue to see a disconnect between RBA guidance and market pricing. Governor Lowe has stated that he will not raise rates until 2023 or perhaps 2024. The markets have ignored Lowe and have priced in three rate hikes for next year. Lowe has pushed back against the market expectations, but with no success. There are two factors which favour raising rates sooner rather than later. First, inflation is moving higher, although it is still within the RBA’s target. Second, the Australian dollar is falling fast and is moving towards the key 70 level. The RBA may consider raising rates if it feels that the exchange rate is falling too low.
- There are resistance lines at 0.7328 and 0.7422
- AUD/USD has broken below support at 0.7184 and is testing support at 0.7134. Below, we find support at 0.7040