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Aussie: outsider again. Forecast as of 21.09.2022

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While many central banks, including the Fed, are ready to sacrifice the economy to beat inflation, the RBA is acting differently. The Australian regulator still expects to avoid recession. Will it help the AUDUSD bulls? Let’s discuss the topic and make up a trading plan.

Monthly Australian dollar fundamental analysis

The Forex market is like a closed-circuit race. While most central banks are set to speed up in the fourth quarter, the RBA signals a slowdown. Not surprisingly, the AUDUSD collapsed to two-year lows. The future of the bulls is uncertain.

According to Philip Low, the fact that the RBA has raised interest rates quite a lot already increases the possibility of a smaller increase in the future. According to the minutes of the RBA September meeting, a slower pace of rate growth becomes more likely as the cash rate rises. Since the beginning of the cycle, the RBA has already raised it by 225 basis points to 2.35%, the most aggressive monetary restriction since the 1980s.

Dynamics of the RBA rate

Source: Bloomberg.

Its consequences are already affecting the Australian economy. As a result, the unemployment rate rose to 3.5% in August. However, soaring export prices, a weak currency, a strong labor market, and significant household savings suggest that Australia can avoid a recession. According to Bloomberg experts, the probability of a recession over the next 12 months is 25%. This is lower than 80% for the Eurozone and 50% for the US.

Bonds also indicate a low chance of a recession. Unlike the US, Australia’s yield curve has not even been inverted.

Dynamics of yield curves in the US and Australia

     

Source: Bloomberg.

The intention of the Australian central bank to keep the economy in balance indicates that the RBA will not follow the Fed and wait for a recession to beat inflation. The RBA claims that the cash rate will depend on the incoming data. According to derivatives, a 50 bps rate hike in October is possible with a 70% chance.

The RBA’s intention to avoid a recession is commendable. However, because of this, the Australian dollar may become an outsider. Due to its status as a risky asset, the Aussie highly correlates to US stock indices, which are falling due to the Fed’s intention to raise the federal funds rate above 4%. Monetary restriction continues, and the latest actions of the Fed negatively affect the economy. Its slowdown and lower corporate profit forecasts are strong arguments for the decline of the S&P 500 and AUDUSD.

The escalation of the armed conflict in Ukraine has become another blow to the AUD. Partial mobilization in Russia and threats of nuclear war are driving investors to safe havens. The US dollar is their first choice.

Monthly AUDUSD trading plan

Thus, even a soft landing does not guarantee good prospects for Aussie. RBA monetary restriction slowdown, worsening global risk appetite, and geopolitical factors will lead AUDUSD to reach previously set targets at 0.655 and 0.645. I recommend entering sales.

 

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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