Aussie: mission possible. Forecast as of 31.01.2024


The Reserve Bank of Australia officials needed less effort to return inflation to target. However, the faster it moves towards the 1-3% range, the worse it is for AUDUSD. Let us discuss this topic and make up a trading plan.

Weekly Australian dollar fundamental forecast

Many thought the euro would rise against the US dollar only because the ECB began monetary tightening later and, therefore, should end after the Fed. However, they were wrong. The same goes for expectations for the Australian dollar’s future. During the latest monetary restriction cycle, the RBA raised borrowing costs by 425 bps. This is significantly less than the Fed’s 525 bps rise. It would seem that the cash rate has room to grow, which should support AUDUSD. However, the reality turned out to be different.

It doesn’t matter how aggressively central banks tightened monetary policy. All that matters is whether they were able to beat inflation and how the economy adjusted to high rates. Judging by the slowdown in Australian consumer prices from 5.4% to 4.1% and core inflation from 5.2% to 4.2% in the fourth quarter, the RBA’s goal of returning indicators to the target range of 1-3% is feasible. An increase in the cash rate is no longer required, although Michelle Bullock and her colleagues do not rule out a hike in the future.

Dynamics of Australian inflation and cash rate

Source: Reuters.

A significant decline in CPI growth rates has increased the chances of the RBA’s start of monetary expansion in May from 30% to more than 50%. The derivatives market is fully confident of a key interest rate cut in August and estimates the monetary policy easing at 52 bps in 2024. Unsurprisingly, the AUDUSD pair fell to the bottom of the trading range of 0.655-0.662.

The pair’s fall is accelerated by alarming news from China. An unexpected reduction in the standards for contributions to the required reserve fund by 0.5 pp to 10% by the PBC scared the markets. About 1 trillion yuan (about $140 billion) poured into the system. It is also worth noting that business activity in the manufacturing sector has been declining for the fourth month in a row, providing further evidence that the Chinese economy is not in the best shape.

Dynamics of contributions to the PBC reserve fund

Source: Financial Times.

According to the IMF, China’s economy will slow down to 4.6% in 2024. However, without monetary stimulus, GDP risks not reaching this figure. Pinpoint Asset Management forecasts a PBC key interest rate cut amid weak economic growth and deflationary pressures. As a result, not only the yuan but also its proxy currencies, including the Australian dollar, are at risk of falling.

Weekly AUDUSD trading plan

The AUDUSD fall could accelerate if the Fed shows no signs of intending to cut the federal funds rate in March and US employment data is strong in January. In this case, a breakout of support at 0.655 will increase the risks of a continuation of the decline in the direction of 0.6435. On the contrary, Jerome Powell’s dovish speech and a weak US jobs report will allow the Aussie to count on a breakout of the resistance at $0.662.

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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