AUD/USD: do not trust the growth of the Australian dollar

Since October of last year, the AUD/USD pair has been trading within a wide-range flat, without leaving the range of 0.70-0.73. This behavior is very typical for the "aussie": the price may fluctuate in one price niche for several months, after which it impulsively moves to the next "level" - higher or lower. Therefore, the main question now is when the AUD/USD will change the trajectory of its movement and, most importantly, in which direction.

The complexity of the situation is due to the weakness of the US dollar. If in previous years, the pair grew, as a rule, due to strong economic reports in Australia and/or due to the strengthening of the commodity market, now the growth dynamics depends on how weak the position of the US currency. The Federal Reserve is still showing a dovish attitude, and dollar bulls are forced to reckon with this fact. Short-term support for the greenback is provided by external fundamental factors (concern about Brexit, for example). But if we talk about the long-term prospects of the greenback, they look rather vague, so the AUD/USD bears should not rely on the downward trend of the pair only due to the strengthening of the US dollar.


However, this does not mean that the bearish trend of the aussie does not have any prospects. In my opinion, the AUD/USD pair has more chances to enter the area of 60 figures than to demonstrate the opposite dynamics. Blame China. The Australian economy is very dependent on the Chinese, so the slowdown in the main macroeconomic indicators of China has not passed without a trace for the green continent. According to the latest data, the Australian economy slowed down more than expected in the third quarter of last year: GDP grew by only 0.3%, while most experts expected a growth of 0.6%. On an annualized basis, the indicator increased by 2.8% against the background of a general growth forecast of 3.3%. Relative to the fourth quarter, analysts also do not harbor optimistic illusions - as many of them believe, at the end of last year, the Australian economy will show even weaker growth.

And in this context, China is "in step" with Australia: according to the consensus forecast, the Chinese economy this year will show the weakest growth over the past 30 (!) years - 6.3%. According to preliminary data, last year this figure was 6.6% after rising in 2017 to 6.9%. The December PMI in the manufacturing sector of China only confirms this trend - in the last month of last year, it crossed the "red line" in the form of the 50 mark and was at 49.4 points.

Related economic indicators also indicate a slowdown in the Chinese economy. Thus, import and export figures showed weak dynamics: exports sharply fell immediately by 4.4% on an annualized basis, while imports declined immediately by 7.6% in annual terms (the highest decline in two years). Summed up the Chinese inflation. According to preliminary forecasts, the consumer price index last year was to grow by three percent, but the real numbers were much lower - 2.1%. Similarly, the producer price index was disappointing, which in December showed an increase of 0.8%, while experts expected a slowdown to just 1.6%.

This negative trend is due to many factors, but the main reason is, of course, the US-China trade war. Now the parties are preparing a broad trade deal that will put an end to almost a year-longl conflict – but even in this case, the key macro indicators will not recover their positions in one day. Therefore, the Australian economy this year will be quite clearly feel the echoes of "military action" on the trade front.

In addition to the Chinese factor, we should not forget about other problems that have no less pronounced impact on the dynamics of the aussie In particular, we are talking about a large-scale decline in the real estate market in Australia: after many years of rising housing prices, the Australian real estate market is slowing sharply. For example, the cost of housing in the eight largest cities of the country fell by 2.5% last year – this is the first fact of price reduction since 2012. For comparison - by the end of 2017, the real estate market in these cities has risen by 11%.


The above circumstances suggest that the Reserve Bank of Australia will certainly not rush to tighten monetary policy. And if earlier, traders were guided in this plan at the end of 2019, now this date has been moved to 2020. Moreover, the growing debt burden of consumers may force the RBA to take a softer position in the foreseeable future, while the weakening of the national currency will only be a "gift" for the central bank's members.

Thus, the AUD/USD pair has an unrealized potential of decline - at least to the bottom of the 71st figure (that is, to the average line of the Bollinger Bands indicator on the daily chart).

The material has been provided by InstaForex Company -