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Despite a number of positive news from the Chinese and Australian economies, AUDUSD continues to fall. Traders have added up to AUD net shorts to record levels, and with good reason. Let’s discuss this topic and make up a trading plan.
Weekly Australian dollar fundamental forecast
Investors do not believe that the titanic efforts of official Beijing will save the Chinese economy. Good news is perceived as temporary, and administrative methods do not work. This is also facilitated by the growing risks of protectionist Donald Trump returning to power. Thus, the weakness of the yuan looks natural. It continues to go down and drags AUDUSD along with it.
According to Bank of America research, its proxy currency, the Australian dollar, is most sensitive to changes in the yuan. Not surprisingly, strong data from Chinese industrial production, retail sales, and industrial earnings allowed the sinking AUDUSD to float to the surface. However, the positivity can be attributed to the Lunar New Year celebrations, which increased consumer activity. It does not prevent speculators from adding up to record AUD short trades.
Dynamics of AUDUSD and net non-commercial combined AUD positions
Source: Bloomberg.
Foreign investors’ interest in China continues to decline. In January-February, China attracted $29.9 billion in foreign direct investment, which is 19.9% less than the same period last year. In order to slow the outflow of portfolio investment, Beijing surprised investors by fixing the yuan at 7.0996. The figure differs significantly from the forecast of Bloomberg experts at 7.222, and the gap is the largest since November. However, the authorities will not save the situation using only administrative methods. Trade wars, which put significant pressure on the RMB and its proxy currencies in 2018, may soon start again.
Consequences of yuan fixing and USDCNY mid rate dynamics
Source: Bloomberg.
It would seem that the February Australian labor market report could help the Australian dollar. Unemployment fell sharply from 4.1% to 3.7%, and employment jumped by 116.5 thousand. As a result, derivatives reduced the chances of the RBA monetary easing in August from 80% to 60%. However, a faster slowdown in consumer prices to 3.4% and core inflation from 4.1% to 3.9% brought things back to normal.
The RBA may reduce the cash rate two to three times in 2024, comparable to the Fed’s monetary expansion rate. However, given the difference in rates and the yield gap between US and Australian bonds, the flow of capital will strengthen the AUDUSD bears. As for the labor market, it is unlikely to be stable for long due to a decrease in the number of vacancies and weak domestic demand, according to Bloomberg.
Weekly AUDUSD trading plan
The positive data periodically provided by the economies of China and Australia does not bother Aussie sellers. Traders have added up to a maximum net shorts since record keeping began in 1995, making AUDUSD seemingly vulnerable to a correction. In fact, a breakout of the support at 0.651 will be the reason for entering sales.
Price chart of AUDUSD in real time mode
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