Market Analysis

AUDUSD: Down Under Or Going Up?

Analysts at ThomsonReuters IFR (TRIFR) felt that in Wednesday’s session the 0.7877 level in AUDUSD, the current 10-day moving average, might prove to be a topside resistance which, if broken, could open the way to the 0.7915/35 area but even if TRIFR’s short term opinion proves to be right, Australian bank NAB, also writing on Wednesday, continues to see further pressure weighing on the Aussie into year end, and is forecasting AUDUSD at 0.7500 in December. Of course a clear distinction has to be drawn between a very short term idea, such as is TRIFR’s opinion, and a longer-term view but as traders devise their own strategies it’s worth being aware of both. While the former is technically-related, the latter is predicated on a macro outlook that still sees broader USD appreciation but coupled with specific factors that affect the AUD. As NAB notes “AUD has fallen against every major currency in the past two and four weeks. The 4% drop from high to low since 8 September compares to a 3% fall for most USD indices.”

It is the Australian bank’s contention that AUD “underperformance relative to the size of the USD move can be attributed in large part to the weakness in industrial metals prices – including a 22% drop in iron ore” but that the recent fall in the Australian currency “has gone well beyond what a straight USD-commodity price correlation would suggest.” NAB feels that “both higher US interest rates relative to Australia and weaker commodity prices have contributed” to the AUD’s fall in the past month even as “risk appetite measures have improved and been a source of support under the AUD.” Consequently, as NAB still sees “ample scope for the USD to build on its recent gains providing December Fed tightening expectations or US tax reform optimism doesn’t suffer material setbacks (or President Trump makes an announcement on his pick for Fed chair that markets conclude means a ‘more dovish then Yellen’ Fed next year)” and also sees “little reason to expect a quick reversal in the downward pressure on industrial metals prices,” then unless risk appetite (arguably supportive of AUD) remains elevated, the Australian bank sees the balance of risk as being to the downside in AUDUSD. Add in that NAB thinks that “domestic AUD influences [are] thin on the ground” with “the RBA this week offering no indication that it is thinking about a policy move anytime soon” and NAB’s argument is rounded out. Traders will decide whether they agree or not.

Written by Neal Kimberley, External Currency Analyst.