Sinking Ship: AUD Failing to Hold its Ground

With the year rapidly winding down, the AUD's fortunes will be linked to several key data releases this week.
Photo: Photo: Bloomberg

There has been massive chaos in the global economy throughout 2016, ranging from issues regarding the pending interest rate hike decision by the Fed to other political developments in the United States and Europe.

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Last week, the Fed went for a hike in its interest rate, which consequently pushed the dollar higher against its all major rivals in the financial world, ultimately prompting the USD to build a strong bullish sentiment in the market. After the Fed went for the rate hike in its last FOMC meeting minutes the Aussie dollar (AUD) become significantly weaker against the greenback and created a new low in the daily chart.

Currently, traders are waiting patiently for a larger decline in the price. The upcoming week is going to be extremely important for the AUD given that lots of major economic data will be published. After the recent US presidential election, Mr. Trump came up with a solid statement regarding the tax cut and increased fiscal spending policy.

Such an optimistic statement from the US government also gave the USD a significant amount of strength in the global economy which made the dollar extremely demanding. The last two-month performance of the US economy was significantly good and this wipes out all the buyers of the other currency pairs in the market.

Thinking Long-Term

The AUD has tried for a smooth recovery but due to the ongoing positive performance from the US economy it started to trend lower in the FX market. Most retail traders are thinking that the AUD will again start its movement against its long-term prevailing downtrend in the market. While things remain negative for the AUD, we are expecting some volatility in this pair in the upcoming week but the market might remain in a sideways direction due to the upcoming Christmas holiday.

The AUD slipped lower again in the market upon the news release of the AAA rating from S&P global. The Australian government is currently facing a budget deficit problem in their economy and this is a serious economic condition. According to leading economic researchers, the AUD might also significantly weaken in the near-term future if things turn negative.

Most importantly a budget deficits problem always create longer term impact in the economy and a recovery from this factor is a very complex and slow process. The overall fiscal spending in the country for mid-June is lower and it exceeded 2.1% of the gross domestic product.

Japan in Focus

On the other side, Japan posted strong data in its trade balance which made the yen stronger against its all major rivals in the forex industry. When the Japanese economy runs in the market the AUD always struggles to hold its firm gain in the market.

On Tuesday, Japan is going to have its monetary policy meeting and investors will be cautiously observing to extract information in order to find a clear clue about the next move of the country.

If Japan holds its ground firmly in the economic sector then we will see a large drop in the AUD in the near-term future since trade balance data directly affects the Aussie’s economic performance. However, the AUD gained some bullish power in last Friday’s trading session as the greenback slipped lower against its all major rivals in the country. Though the mighty USD became slightly weaker the dollar index still holds a 14 year high in the global market.

Most traders are also worrying about the ongoing strength of the USD. Some leading investors are also thinking that the market has absorbed all the fundamental news releases of the US economy. Most importantly the FED needs three rate hikes in the next year to retain the ongoing strength of the USD.

Tall Task?

Three consecutive rate hikes in a single year will be extremely difficult for the Fed since the US needs to exhibit strong economic performance in every sector. A single weak data point in any of the financial sectors put the strength of the dollar at risk.

There are many important economic events in the upcoming week for the AUD and if all the data comes in favor of the AUD then the currency could go for a bullish retracement in the upcoming week. However, most of the major currency pair will exhibit low volatility during the remaining part of the year due to the Christmas holiday.

Most of the big investors are now out of the market and playing safe with their hard earned profits. If the dollar continues to behave like this in the near future then we will be seeing a large decline in the Aussie dollar. In the eyes of trained professionals, there is a higher chance that the AUD will again slip lower in the market and resume its bearish trend in the market.

However, those who are trying to enter long in this pair should wait for negative US economic news releases. The dollar needs to step aside for AUD buyers to step in.

Investors and hedge firm are now waiting patiently to enter short into this pair with the bearish retracement. But since there will no volatility in the market in the remaining part of this year it’s better to stay on the sidelines and wait for the beginning of next year.

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