- The AUD/USD has started to dip after a bullish run.
- The upward run of this currency pair has become increasingly divorced from market fundamentals.
- Therefore, I see a decline for the AUD/USD ahead.
Last month, I made the argument that the Aussie dollar could be set for further gains against the greenback – primarily on the basis that the coronavirus pandemic has not hit Australia as hard as many other countries, and a drop in interest rates in the United States would likely mean less demand for the U.S. dollar going forward.
With that being said, the AUD/USD has been retreating since the end of April:
Even though the coronavirus pandemic has not had as severe an effect, Australia will still suffer economically as a result of the associated lockdowns and travel restrictions. Therefore, gains on the AUD cannot be sustained solely on the argument that Australia has been more shielded from the pandemic than other countries.
Indeed, markets seem to be taking the view that the Aussie dollar is now expensive and has seen an overly bullish run as a result of COVID-19.
It is now thought that the fair value of the AUD/USD stands at 0.61 as opposed to the current price of 0.64, which means that we could still be in for a further drop in the currency. Ultimately, the consensus appears to be that the currency’s rise has remained divorced from market fundamentals.
For one, coal prices in Australia have hit their lowest level since 2016.
Given that coal is one of Australia’s top exports, this will greatly reduce the amount of coal supplies that can be exported at a profit, and demand for the AUD will be weakened as a result.
Furthermore, with US-China tensions having increased significantly regarding a dispute over the origins of COVID-19, this has sparked renewed fears of a trade war escalation. Such a development could significantly hinder growth in China, which in turn would have a considerably negative impact on Australian exports. As a result, the AUD can be expected to decrease further under this scenario.
Regarding the fundamentals of the Australian economy itself, the Reserve Bank of Australia has recently stated that it expects national output to fall by roughly 10 percent in the first half of 2020, with a 10 percent unemployment rate and a 20 percent decline in total hours worked by Australia’s labour force.
This is anticipated to bring about a negative year-ended headline inflation rate in June, although underlying inflation is expected to remain positive.
Taking these points into account, the economic impact of the pandemic on Australia looks to be every bit as severe as for Europe and the United States, and while the current cash rate stands at 0.25%, negative interest rates cannot be ruled out.
In this regard, I take a bearish view on the AUD/USD at this time. The currency has become increasingly divorced from market fundamentals, and for this reason a decline in the currency pair is likely going forward.
This article was written by
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