AUD: correction to the downside?
The AUD has been on a big bull run to the upside and in a previous article we noted to the risk of a correction to the downside is high. In this article, we will look at the outlook for AUD/USD and AUD/JPY. Below you can find a review of the fundamentals sentiment and the key technical levels of support and resistance to look out for…
Fundamentals & Sentiment
The AUD has firmed against the safe-haven USD and JPY due to the market looking for a quick recovery in the global economy this year which has boosted the price of commodities and all commodity currencies. While the AUD has risen strongly, we have run too far to the upside and the good news is discounted in our view.
The AUD is now very vulnerable to a correction to the downside and the key technical levels to watch are outlined below and then our view of commodity prices and an overview of iron ore. The AUD is heavily correlated with iron ore due to it being Australia’s biggest export – iron ore prices are a bubble and prices are now falling if they continue to fall we expect this to weigh heavily on the AUD.
In terms of the technical picture both AUD/USD and AUD/JPY, we see the Aussie as a sell on rallies back to the resistance levels indicated and in terms of potential downside in our view, it’s big due to the large number of speculators who are long the AUD and key levels of support are noted on the charts below.
Iron Ore and the Commodity Bubble
In terms of capacity utilization rates at 163 blast furnaces in China fell for the 5thstraight weeks to 82.2% last week, according to Mysteel consultancy. This may lead to a rise in steel product inventories which had been increasing for the last month and in the week to January 21, they moved up 6% compared to a week earlier. China has also recently announced it will cut crude steel production in 2021 as a key part of its 14th Five-year Plan. We also have the Lunar New Year holiday coming up which will see the Chinese industry wind down for the holiday period. We see the odds of a major move to the downside in iron ore as high and also the commodity complex generally.
In terms of commodity prices generally there overbought as speculators have bought the entire complex heavily. We now expect other major commodities which Australia exports such as copper, natural gas, coal and aluminium to also fall in price.
Research provided by LearnCurrencyTradingOnline.com
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