Aussie can be proud. Forecast as of 19.12.2023

The AUDUSD price falls during recessions and monetary tightening cycles of the world's leading central banks, including the Fed. However, once the time comes for dovish shifts, the Aussie rallies up. Let us discuss the Forex outlook and make up a trading plan.


Fundamental Australian dollar forecast for six months

How can a small economy withstand global recessions? How can it survive during storms in global financial markets? It is saved by a floating exchange rate. Thus, the floating exchange rate of the Australian dollar helped the Australian economy avoid about five declines in GDP. Moreover, the Auzzie, which is the sixth most traded currency in Forex, has long been perceived as an indicator of the global economy state. An improvement in the global outlook supports the AUDUSD uptrend.

Most traded Forex currencies

Source: Bloomberg.

Australia is an exporter of commodities and an importer of manufactured goods. The resulting volatility is smoothed out by the floating AUD exchange rate. The AUDUSD prices tend to fall during monetary tightening cycles. This is worsening global risk appetite and pressing down the demand for commodities. In contrast, monetary stimulus is creating tailwinds for stock indices, commodity market assets, and higher-yielding currencies.

In this regard, the Fed’s dovish shift means more to AUDUSD than hawkish rhetoric from the Reserve Bank of Australia, positive Chinese industrial production data, or positive Australian employment data. The latter increased by 61,500 in November, which is six times higher than the forecasts of Bloomberg experts. The increase in employment allows the RBA to leave the door open for further rate hikes. Although the markets believe that the cycle of monetary tightening is completed, and expect that the next step of the central bank will be a rate cut.

Australia’s employment, earnings and inflation

Source: Bloomberg.

At first glance, the fact that inflation in Australia is higher than in other advanced economies, and the RBA has tightened monetary policy less than its peers from the United States or New Zealand encourages investors to buy the AUDUSD on the divergence. Indeed, if the RBA rate rises and the federal funds rate falls, there will be no better conditions for purchasing an Aussie.

However, in fact, it is much more important that the Fed turns dovish, accelerating the growth of US stock indices. Their rally is welcome news for the global economy and accelerates the AUDUSD rally.

Nevertheless, markets seem overconfident in the Fed’s monetary expansion. Expectations for the federal funds rate to be cut six times in 2024 are clearly too high, as Loretta Mester mentioned. According to the Cleveland Fed President, markets are running ahead of themselves. They are confident in a quick normalization, but for now, this is not necessary. Most likely, we will see some pullback in the S&P 500, which will be a reason for the AUD descending correction.

AUDUSD trading plan for six months

At the same time, easing financial conditions in the USA suggests that the US economy will maintain its strength. Coupled with the recovery in European and Chinese markets, this supports AUDUSD. I stick to my November forecast for the pair to grow to 0.68 and 0.71 by the end of February and May. I recommend holding up the longs opened on the correction to 0.6525 and adding up to them from time to time.

Price chart of AUDUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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