Outlook and forecast: AUD/USD
We have been bearish the AUD in previous posts and it’s fallen hard but will we the pair fall further or are we due a bounce? We could see a bounce which will be a sell in our view but the longer-term picture is bearish for the AUD. Our view of the fundamentals, sentiment, and technicals below…
RBA Meeting Market Short and Bearish AUD
“After announcing a reduction in its quantitative easing (QE) program last month, which would have seen bond purchases reduced from $5 billion to $4 billion per week, the RBA is all but certain to reverse the decision, in order to maintain liquidity during the expected slow down in the Australian economy.”
With Australia set for a quarter of negative growth due to lockdowns, and the possibility of a double-dip recession, the RBA is likely to announce a reversal of bond tapering and some market forecasters are looking for an increase in stimulus to support the economy further. So the market looking for the RBA to be extremely dovish coming into the meeting and speculators are heavily short.
The Big Fundamental for the AUD – Watch Iron Ore
The extreme positioning could see the Aussie bounce as an increase in stimulus might not happen in our view but any bounce in the Aussie is a sell. The main fundamental which will weigh on the AUD going forward is the price of Iron Ore. Iron ore is the bulk of Australia’s export revenue and we are now seeing it fall:
China’s record steel output recently was fuelled by record scrap use NOT increased imports from Australia or Brazil. In terms of scrap a 1% increase in China’s scrap use replaces 18Mtpa of iron ore demand about the capacity of a medium-sized iron ore mine chart below:
The supply and demand fundamentals are bearish for iron ore and speculators have pushed prices too far to the upside and we now expect a major decline as speculators are taken out on stop which will weigh on the AUD…
Technical Analysis
On the weekly chart, we can see resistance at 0.7400 and then major resistance at 0.7500 our target on the downside is the big support level at 0.700 which we think longer term is “fair value” for the Aussie.
In terms of the daily chart, the market is heavily short and a move above first level resistance is a strong possibility in our view. If we were to breakout above the 0.7400 level we would look to sell back below the level with a stop behind 0.7500. If we were to rally up to 0.7500 we would sell into the level on weakness with a stop behind 0.7600 – if we don’t rally we would sell a new daily low with a stop well back from the 0.7400 level.
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