AUD/USD: outlook and forecast
AUD/USD is trading in a tight sideways channel volatility is dropping and this warns of a big move our view of the fundamentals sentiment and technicals below.
The AUD is a risk on currency and is heavily sensitive to global growth, trade, and the price of commodities. We saw a big rally unfold as the market bought risk currencies against the USD as the Fed provided stimulus to increase the supply of dollars and speculators also bought commodities as they bet on a strong global recovery.
The Bullish Fundamentals have Peaked for Australia
The bullish fundamentals peaked for the AUD: The Fed will shortly reduce stimulus and in our view do so before the market expects which we have noted in previous posts which is bullish the USD. Commodity prices are also set to go lower as China the world’s biggest commodity consumer slows up.
Global stock markets have also been strong and if we were to see them break lower this would add additional downside pressure on the Aussie.
The Outlook for Iron Ore And Coal Australia’s Biggest Exports
In terms of commodities, the biggest export of Australia is Iron ore which accounts for well over 50% of export revenue and coal is the second biggest export at about 20%.
The charts below show the iron ore bubble has burst as speculators exit the market and in terms of coal we would expect this bubble to burst as well. The rise is based on a short-term supply squeeze and hot weather causing a Chinese spike in demand. The supply squeeze is about to end and China wants the price of coal lower and will use its strategic reserve. The Aussie in our view has limited upside and a lot of downside as both iron ore and coal fall back to fair value.
Trader Sentiment
In the short term on the COT Net Traders positions, we do have a major short position held by large funds which could trigger a short-covering rally but that would in our view would be a minor rally and a selling opportunity. The odds in our view favor more downside. our view of the key technical levels to watch below:
Technical Analysis
On the monthly chart, we have resistance at the 0.7400 then 0.7500 level. Our targets are a move back to the 0.700 level with a possible overshoot down to 0.6500. On the daily chart, we view the Aussie as a sell on a downside breakout below 0.7300 with a stop behind 0.7400 or if we were to break 0.7400 we would look to sell on weakness into the 0.7500 level.
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