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Source: Reuters
Summary:
AUD drops below 1-month low, hurt by weak Chinese data and falling commodity prices. China’s slowdown, a major trading partner, is a worry for Australia’s export-heavy economy. Despite the strong employment data in Australia, the AUD could stay low as the Japanese Yen strengthens, too.
The Reserve Bank of Australia (RBA) might hold rates steady despite strong employment data, as the Federal Reserve (Fed) is expected to cut rates in September 2024. This could further weaken the AUD compared to currencies like the JPY.
Key points
- China’s slowdown weakens demand for Aussie exports (energy & metals) dragging AUD down.
- JPY strengthens as risk-averse investors flee China (CNY) for JPY.
- RBA rate hike unlikely to lift AUD much despite strong Australian employment.
- China’s $715 billion hedge fund crackdown adds uncertainty, potentially hurting AUD further.
Market impact:
1. AUD in a downtrend
Concerns about a slowdown in China, a major trading partner for Australia, are hurting demand for the AUD. This is evident by the negative impact of the recent interest rate cut by the People’s Bank of China (PBoC). Broader concerns about slowing global growth could further reduce risk appetite, pushing investors away from the AUD.
2. JPY in an uptrend
The JPY is gaining from its less-risky status as economic uncertainty and risk aversion rise. It is fueled by the suspected intervention by Japanese authorities and US political uncertainty. Expectations of a potential rate hike by the Bank of Japan (BoJ) make the JPY more attractive to investors seeking higher returns.
3. PBoc interest rate cuts
The People’s Bank of China is set to cut interest rates to stimulate the Chinese economy. This could weaken the CNY as lower interest rates make holding the currency less attractive. However, the weaker currency might boost Chinese exports.
What experts say about weakening AUD
Joseph Capurso, heading international economics at the Commonwealth Bank of Australia, said, “The interest rate cuts by the People’s Bank of China (PBoC) and the outcomes of the Third Plenum are too modest to convince market participants that a significant acceleration in the Chinese economy is in prospect.” Adding to the comment, Federal Reserve Bank of New York President, John Williams stated, “the long-term trends that caused declines in neutral interest rates before the pandemic continue to prevail.”
Fed Chair Powell stated in July 2024 that the three US inflation readings from this year conclude that inflation is on track to meet the Fed’s target sustainably, suggesting that a shift to interest rate cuts may be imminent.
Future outlook:
- Weakening commodities: A continued decline in energy and metal prices, due to Australia’s reliance on these exports, could further pressure the AUD.
- Slowing the Chinese economy: A sluggish China could dampen demand for Australian exports and weigh on the AUD.
- Potential RBA rate hike: The AUD could strengthen if the RBA raises interest rates to address a tight labor market.
- Weakening US Dollar: Expectations of a Fed rate cut could weaken the USD, limiting downside for the AUD/USD pair.
Insights for traders
Interest rate differentials
The Australian Dollar gains from a significant interest rate differential compared to the Japanese Yen. With the Reserve Bank of Australia (RBA) maintaining a cash rate of 4.35% against the Bank of Japan’s (BOJ) near-zero rates, the AUD/JPY pair is attractive for carry trades. This interest rate spread can provide yield to traders holding long AUD/JPY positions.
Technical analysis
Traders should utilize technical analysis tools to identify potential entry and exit points. The key levels to watch include the psychological round numbers, trend lines, and moving averages. The recent high of 107.63 Yen and the low near 86.50 Yen can serve as crucial resistance and support levels, respectively.
Monitoring US Federal Reserve decisions
The US Federal Reserve’s monetary policy decisions can influence the global risk sentiment and, consequently, the AUD/JPY exchange rate. Any unexpected moves by the Fed could lead to volatility in the currency pair.
Insights for investors
Long-term Australian resilience
Australia’s economic resilience, driven by commodities exports and ties to China, positions the AUD as a relatively strong currency in the long run. Investors should assess the health of the Australian economy, including its GDP growth, employment rates, and trade balances, to gauge potential AUD appreciation.
Diversified currency exposure
Investors should consider diversifying their currency exposure by including both AUD and JPY in their portfolios. This diversification can hedge against currency volatility and provide opportunities to gain from both risk-on and risk-off scenarios.
Equity market considerations
Australia’s equity markets, particularly those related to commodities and natural resources, can be appealing to investors looking to capitalize on global economic recovery via CFDs. Conversely, Japan’s equity market might offer stability, especially in sectors such as technology and manufacturing.
Conclusion
The Australian Dollar is weakening due to a slowdown in China, a major trading partner. This has caused a drop in demand for Australian commodities like metals and energy, which hurts the AUD. Additionally, a potential rate cut by the US Federal Reserve is strengthening the US Dollar, putting further pressure on the AUD.
However, a strong jobs report in Australia suggests the RBA might raise rates, which could limit the AUD’s decline. Overall, the AUD faces headwinds from China’s slowdown but might find some support from a potential RBA rate hike. Adding to the AUD’s downturn, the Japanese Yen (JPY) is strengthening. This is due to factors like suspected intervention by Japanese authorities and expectations of the Bank of Japan raising rates. A stronger JPY weakens the AUD/JPY pair, further pressuring the Australian Dollar.
Forecasts and predictions about future performance are inherently uncertain and speculative in nature. While every effort has been made to provide accurate and reliable information, there is no guarantee that the events or outcomes discussed will occur as forecasted. Past performance is not indicative of future results.
Disclaimer: All material published on our website is intended for informational purposes only and should not be considered personal advice or recommendation. As margin FX/CFDs are highly leveraged products, your gains and losses are magnified, and you could lose substantially more than your initial deposit. Investing in margin FX/CFDs does not give you any entitlements or rights to the underlying assets (e.g. the right to receive dividend payments). CFDs carry a high risk of investment loss.
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