AUD/USD: Further Declines Likely | Seeking Alpha


Earlier this month, I made the argument that the AUD/USD may hit a ceiling going forward.

My reason for arguing as such is that the U.S. dollar has started to see strength against major currencies once more as risk-off appetite grows heading into Q4.

Specifically, with a resurgence of COVID-19 cases in Europe, a no-deal Brexit looking more likely, as well as the upcoming U.S. Presidential elections – uncertainty abounds in Q4.

For this reason, it is not surprising that traditional risk-on currencies including the Aussie dollar have started to decline.

Source: investing.com

With a recent announcement that Australia will ease credit rules in order to stimulate borrowing – the AUD/USD seems to have met some support at just above the 0.70 level.

However, if the past week is any indication – the fact that risk aversion is growing in the markets once again means that we could see further declines in the currency going forward. While easing of credit rules and overhaul of bankruptcy laws to help small businesses may succeed in boosting domestic spending, Australia’s export market is primarily resource-based. In this regard, currency demand will continue to be determined in large part by demand for Australian exports.

Moreover, given that the AUD/USD has risen sharply this year due to Australia’s relative success in fighting off COVID-19, this has come at the cost of closing the country’s borders and the fact that the currency is now more expensive makes Australian exports less appealing.

Source: investing.com

We can see that Australian exports have hit their lowest level since 2018:

Source: tradingeconomics.com

Trade tensions between Australia and China have clearly not helped matters, with the Australian National University reporting that Chinese investment into Australia is down by 47% percent, from $4.8 billion in 2018 to $2.5 billion in 2019.

Such a drop in investment happened before COVID-19, which illustrates that trade between the two nations has been on shaky ground even before the pandemic.

As regards the U.S. dollar, Trading Economics reports that the dollar index has seen the biggest weekly advance since April:

Source: tradingeconomics.com

Aside from surging COVID-19 cases in Europe once more, part of the reason for the rise in the dollar has been the perception of a more accommodative monetary policy by the Federal Reserve as compared to the European Central Bank.

Specifically, the central bank has committed to holding interest rates at current lows until at least 2023. While this announcement may ordinarily lead to dollar weakness due to lower rates – the market seems to have taken confidence from such an announcement – as the central bank is emphasising a revival of economic growth in its monetary policy.

In this regard, even if COVID-19 cases remain relatively lower in Australia than the United States – the economic damage in Australia has still been profound due to the associated lockdown restrictions. From this standpoint, I do not foresee a situation where the AUD/USD will gain further due to lower COVID-19 cases.

For these reasons, I expect further downside in the AUD/USD at this time.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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