The Australian Dollar (AUD) is commonly referred to as a commodity currency. As in, the relative strength of the currency is correlated with the price of certain commodities. For the AUD, Iron Ore and precious metals are the commodities that significantly impact its value.
Be that as it may, there is more to the AUD than commodity prices. The actions, or inaction, of the country's Central Bank is also a decisive variable affecting the price of the AUD. Therefore, a well-rounded analysis of the events concerning the AUD is helpful for traders of commodity currencies.
With this in mind, let us look at some of the key events likely to affect the commodity currency next week.
A critical economic report is due from the Reserve Bank of Australia (RBA) on Monday, and traders will be watching and folding the results into their own trading decisions.
Australia Reserve Bank Governor, Philip Lowe, will be speaking on Monday. However, the RBA's public announcements have recently fallen down the rankings of importance for traders. The RBA is stubbornly dovish, and no one is expecting them to make any changes to its base interest rate or asset purchasing any time soon. Yet, the 15-day SMA closing in on the 50-day SMA in the AUDUSD chart supplied indicates the bearish disposition of the AUD may reverse.
The price of Iron Ore has famously hit record prices this year, contributing to record Australian export values and the AUD reaching USD 0.79.
However, the high prices Iron Ore fetched in May have since evaporated, and with it, the AUD has fallen from its lofty perch. Currently, Iron Ore is priced at US $132.5 per tonne, a 2021 low representing a 40% decrease from its 2021 high. The price drop has been sharper than its rise, as China's stockpile of Iron Ore kept rising and demand from Chinese manufacturers declined.
The price of Iron Ore is expected to remain somewhat robust for the remainder of 2021 before falling to US$100/T by March 2022. At least, according to Goldman Sachs and the Australian government's commodity forecaster. However, the forecasts available were made before the slowdown in the Chinese economy became undeniable. The drop in Iron Ore could come sooner rather than later.
Countering the prediction that Iron Ore prices will fall is the developing political upheaval in the African nation of Guinea. The West-African country is a young up and coming Iron Ore producer. Its Simandou Iron Ore Project is expected to rival one of Western Australia's most prolific mining regions. As such, the pricing prediction of Iron Ore moving forward into 2022 and beyond considered Guinea's fresh supply of Iron Ore hitting global supply chains. Needless to say, if political strife in Guinea were to continue, prices might remain inflated for longer. In such a case, the AUD could rely on Iron Ore supporting a higher baseline.
The AUD is currently on the radar of a few account managers at BlackBull Markets. Being based in New Zealand, our closest neighbour's currency is a reasonably popular instrument to follow. News affecting the AUD will typically circulate the office quickly.
The ever-present influence on global markets, Covid lockdowns, are once again affecting Australian business and everyday life. New South Wales, the country's most populated region, is currently under lockdown to curb the spread of the Delta variant. Australian Prime Minister Scott Morrison recently extended the length of the lockdown for another week. Reports are that authorities are struggling to contain the far more virulent strain, and stricter and lengthier lockdown measures could soon be enacted.
From a technical perspective, on the daily chart, an interesting situation is developing.
Let's look at the Fib retracement that the pair has followed since its high in February 2021.
The recent downwards trend appears to have slowed on the Daily chart but is still definitely drawing down. A brief period of consolidation formed in between the 38.2% and 61.8% Fib level. The pair is trading well below the 50.0% level and is much closer to the latter than the former.
The general market sentiment is that the AUD is still a short. At least this was the call when the AUD was closer to $0.80 per dollar. The 61.8% Fib level is the next target for the AUD bears if the short sentiment holds today. At this level, the AUD would be back in a territory below 0.73800, representing a six-month low for the AUD.
The AUDUSD enjoyed a good deal of 2020 in the zone between 61.8% and 100%. If the pair were to cross the 61.8%, it could be some time before we see some price action outside this boundary.
The ASX 200 was an anomaly over Thursday Asian session. It was one of the few major indices that closed higher than it opened. Since this time, stocks have sold off in Europe and the US. The sell-off was particularly heavy in Europe, with the FTSE down by 1.68%, The CAC down by 2.01%, and the DAX down by 1.73%. As it stands, ASX200 futures are trading down, indicating that the Australian index will open on Friday trading approximately 40 points down or 0.67%.
Consider this: In the 66 weeks since the AUD reached a low of 0.5741 in March of 2020, the AUD has strengthened over 43 of these weeks. If you want to consider the weeks in isolation from one another, this translates to an approximate 2:1 win rate for the AUD.
The AUDUSD is trading at 0.7524 at the time of writing.
The majority of the weeks that AUD has weakened against the USD have occurred since February 2021. The frequency of bearish AUD weeks really began to pick up at this time.
This poses the question: has the AUD peaked in 2021? And can we expect a considerable turn to the downside during the rest of the 2021? What things might we consider when evaluating where the AUD will move in July and beyond?
Volatility has definitely subdued in the pair, as the worst of the pandemic is likely behind us. For the best part of 2021, the pair has consolidated between 0.7550 and 0.7900.
From the view of the weekly, the pair is currently edging past the lower bound of this range. From the perspective of the daily chart, the pair is flirting with the 50.0 retracement level.
The smaller time frames might reveal if the AUD bears aim to force the pair to retrace back to the 61.8 Fib level.
Butting up against this predication is the Delta variant that has spread Downunder. Several of Australia’s territories have reimplemented lockdown measures, while quarantine-free travel between the country and its close partner, New Zealand, has been temporarily halted. In saying this, the effects of the current lockdown measures are not expected to be incredibly disruptive and are not are strict as those implemented throughout 2020.
The story is a little different in the US. Very little concern appears to be directed toward Covid Classic or its Delta Variant. The success of the US vaccination program seems to quell fears of Covid. The Australian vaccination program has been much slower than the US. The Aussies had the advantage of taking their time in dispensing vaccinations, as the virus was not rampant in the country.
The consequence of this slow rollout means that the tables have turned in the global race to recover from Covid. Like Australia, the countries that eradicated the virus early are now behind the ball with vaccination and thus more suspectable to further waves of the virus.
Setting the tone for the AUDUSD for July will be the high impact reports due this week.
On Thursday, we are expecting the Australian Trade Balance (May). Strong Commodity prices, especially Iron Ore, is expected to lift the country’s Trade Balance to a surplus of AU$10B. Industrial metal prices moving forward will be a factor in deciding the fate of the AUD.
The following day, the US will release the hotly anticipated Nonfarm Payrolls for June. Analysts are expecting approximately 690K jobs to be added to the economy. However, predictions have been off the mark by uncomfortable margins in the past few months. For example, in April, the actual number of jobs created was lower than 650K than predicted.
Since April, the US economy has had time to settle down slightly, but a Payroll figure less than expected wouldn’t be shocking. However, if this was to occur, the impact on the USD could be minimal. In April, the USD reacted mildly to the terrible Payroll figures. This might be because slower job growth can help keep talk of the Fed tapering its stimulus at bay for a little bit longer.
Oil hitting one hundred dollars per barrel sometime in the next six months is the bullish sentiment held by many financial institutions.
Analysts expect that Oil producers will not be capable of ramping up supply in time to meet an anticipated surge in demand. Increasing supply is not a simple undertaking. It generally takes weeks or months of investment to ensure the infrastructure is in place to manage the change in supply.
The lift in demand is supposed to be driven by economies further relaxing travel and commerce restrictions in line with the rollout of their respective vaccine programs.
The shortage of supply in the face of surging demand will then push the Oil price up another USD 30 per barrel. WTI and Brent are currently in-between USD 72 and 75 per barrel, with a general momentum to the upside. The upside momentum is in line with the general optimism swirling around global markets since the world's major economies, particularly the US and the United Kingdom, reported the immense success they were having in vaccinating their populations.
The major event that can derail the bullish predictions for Oil is, of course, Covid. In particular, the Delta variant spreading further afield.
The drop in price that Oil experienced over Monday trading (28/06/20201) perfectly Illustrates the power of the delta variant to affect Oil prices
The price drop followed new lockdown measures in South Africa, Australia, New Zealand, and Malaysia. Throughout Monday trading, WTI fell by 1.5%, and Brent fell by 1.9%
To make matters worse for the bullish predictions for the Oil price is the upcoming OPEC meeting on July 1st. The Oil-producing nations might agree to lift the number of barrels they supply.
The last time OPEC met, they were drinking the positive-optimism cool-aid being served at that time. But, in doing so, they knowingly dismissed the lacklustre data coming from the US and Eurozone and the worsening situation in India and Japan.
However, OPEC noted that they had not ruled out a negative outlook for the rest of the year in their last meeting. Therefore, we could expect a different tone from the group in the forthcoming meeting.
Suppose OPEC continues to believe that the global economies are on their way to recovery. In that case, they might continue on their plan to lift supply, and a bullish prediction extending to $100 per barrel begins to look less likely.
This week ahead, we have a plethora of data coming out across the world dictating the strength of "main street" and its contribution to the Coronavirus Pandemic's global recovery.
With that said, the Coronavirus continues to present itself as a factor pulling back the global economy's growth. With financial markers such as Brent Crude and WTI prices returning to pre-pandemic levels, evidence of life post Coronavirus slowing down is coming into sight. However, as shown, even the countries who handled the Coronavirus well indicate that we still have to grapple with the strengthening strains.
Case in point – I am currently writing this at home, as New Zealand, renowned for their Coronavirus Response, has placed their largest city, Auckland, back into a level 3 lockdown following three community transmission cases from the stronger UK Strain.
However, as we all know, financial markets do not sleep. Here is your week ahead.
Japan has not had the best success regarding the fight against the Coronavirus. Initially praised for their no lockdown strategy, dependent on the mask-wearing, cleanliness culture Japanese citizens exhibit. Three waves of the Coronavirus later, each larger than the previous, and the Japanese Government depend on the vaccine to help save their citizens from further infections.
However, the Japanese economy is showing its strength, and analysts predict they may come out of the pandemic stronger than expected. Unemployment has stayed at a modest 2.9% due to Bank of Japan's corporate lending scheme, alongside bankruptcies falling by around 20% from a year earlier in recent months. Analysts predict GDP growth of 10.1% in the last quarter of 2020.
Last year today, the Coronavirus had started to hit the shores of many countries. A couple of months later, most of the Eurozone would have concluded that their lockdowns were adequate in eliminating most of the virus and that citizens may freely roam around Europe for the summer.
That decision would cost them many more lives and setback the road to recovery.
It is now 2021, and we're approaching the same period in which these decisions were made. However, now, Europe has been slowly rolling out the Coronavirus vaccine to citizens. However, the President of the European Commission, Ursula von der Leyen, has stated that the EU was late to rollout and authorize Coronavirus vaccines and are "still not where we want to be." However, a better than expected GDP print may mean stronger Euro, which may be detrimental to exports.
With the United Kingdom slowly getting a grasp on the Coronavirus with the help of a vaccine, the new strain provides new challenges as British scientists state the U.K Coronavirus strain is "likely" 30% to 70% deadlier than the original. With that said. Boris Johnson is Optimistic that the Coronavirus Lockdown can be eased soon – however, as history shows, lockdown is only effective if there has not been community transmission for weeks. Analysts predict CPI to drop slightly to 0.5% from 0.6% year over year.
Like the United Kingdom, the United States has been given a tailwind in the form of a vaccine. However, similar to the United Kingdom and Europe, the vaccine's distribution infrastructure has been criticized. With the U.S having many months to prepare for the eventuality of a vaccine. Cases are down from their all-time highs, although still above 100,000 for their daily average. Analysts predict U.S Retail Sales to rise to 0.7% this week ahead, up from -0.7% a month before.
Australia has recovered from a devastating 2nd wave by introducing a drastic lockdown near the middle of 2020. However, there have been many flare-ups around Australia, with one in Sydney and one currently in Melbourne, which has caused the local Government to implement a short lockdown. However, there has been evidence over the past couple of months of Australians using the money they have saved during the past lockdowns and spending it. With that said, analysts predict a slight fall in the unemployment rate to 6.5% from 6.6 in January, with retail sales expected to bounce to 2% from a negative 4.1%.
Busy week ahead. Trade safe, and stay safe.
We see the AUD/USD play well into the macro recovery story. The historically known commodity currency blasted past 0.75c in the latter part of 2020.
We previously talked about how there were clean wicks straight 0.76 and how a breach of a key 161.8% entrancement level at around 0.77c would see clean traffic to 80c. As of this moment, we see the AUD/USD strongly past the 0.77 mark – will we see 80c?
With the Vaccine rollout plan set to first make its way to Australians with the highest risk of exposure at the end of February, alongside lofty commodity prices, the Australian dollar has had really good tailwinds as of late.
However, in a recovering economy, alongside large commodity-based industries domiciling in Australia, an extremely strong home currency is not ideal. BHP Billiton, an Australian multinational mining, metals, and petroleum company, stated that the Australian dollar's strengthening was one reason they impaired the value of their Australian thermal coal assets by $250-$350 Million.
Another tailwind that the Australian dollar has been receiving is general dollar weakness across the board. This is on the back of many large institutions such as Citibank, who called for the dollar to weaken up to 20% on further vaccinations this year, stating that The distribution of Vaccines "will catalyze the next leg lower in the structural USD downtrend". Furthermore, as inflation expectations rise in the United States, "this would incentivize investors" to hedge currency exposure, Citibank strategists stated. "Given this setup, there is the potential for the dollar's losses to be front-loaded".
Many analysts are bullish on the Australian dollar due to its historically strong rebound on recovery periods. Are you looking at the Australian dollar?
AUD/USD has been a strong performer in the currency markets, returning just under 30% since its March lows. We talked about how the Australian dollar was poised for a rally on a market recovery earlier this year.
The market has recovered, and the Australian dollar has recovered with it. This was due to the Australian dollar being mainly a "commodity currency," with manufacturing worldwide slowly starting to pick up, specifically in China. Erik Nelson from Wells Fargo stated that "If you consider some of the fundamentals in Australia, you can justify the valuation of the Australian dollar at current levels" and that Australia is "very well positioned right now" about its exports to China.
However, the AUD/USD has fallen over 3% in the past couple of days. This has been on a multitude of factors, the US Dollar strengthening on Donald Trump's recovery, recent weakness in the oil prices, and the tremulous Coronavirus situation in Australia have pushed the Aussie lower.
Yesterday, the RBA left rates at 0.25%, which it has been since the initial rate cut in March. RBA's Governor Philip Lowe stated that the decision was based on the uneven recovery of the global economy due to the Coronavirus – "The global economy is gradually recovering after a server contraction due to the pandemic. However, the recovery is uneven and its continuation is dependent on the containment of the virus".
Analysts are predicting a rate cut in the next six months. However, there is little chance for rates to fall into the negative as Governor Lowe historically has been against negative rates, citing that they are "extraordinarily unlikely in Australia" due to the documented downsides on consumption sentiment.
Furthermore, Australia has been able to control its second outbreak in the state of Victoria, enabling them to focus on the path to recovery from the Coronavirus. The RBA also stated that "Labour market conditions have improved somewhat over the past few months and the unemployment rate is likely to peak at a lower rate than expected"
With elections coming up in the United States, the Trans-Tasman bubble between New Zealand and Australia coming to fruition, and Australia slowly recovering, market volatility may affect the AUD/USD pair, rather than a long term trend. I believe the Australian dollar's tailwinds are a lot stronger the potential headwinds it may face.
Anish Lal has some excellent analysis on the recent market drop due to Trump's tweet - you can watch it here.
Hello traders! This week ahead, we have many events that directly affect significant currencies such as the GBP, USD, the NZD, and the Euro. Traders should be aware of these critical events not to be whipsawed by the market. Here is your week ahead
UK Inflation dropped sharply to 0.2% in August, as stated last Wednesday, primarily due to the governments' "eat out to help out" scheme, pushing restaurant and café prices lower. After July's higher CPI figures, this conveyed the strong influence the "eat out to help out" scheme had on meal prices. The report explicitly talks about Inflation. However, implicitly talks about what the UK's treasury economic outlook is. A dovish tone may send the GBP against the US lower this week ahead.
We can't seem to escape Jerrome Powell, can we? Dubbed as the Reserve Bank of the World, the Federal Reserve of the United States' economic outlook and changes in policies directly affects traders' and investors' sentiment. It is without saying, traders and investors should be looking at these speeches this week ahead like a hawk to examine any change in Powell's tone about the economy. A more than expected dovish tone should push the USD higher against major currencies, vice versa.
Similar to the Inflation report hearing, Governor Bailey's speech will set the tone for the future of the UK's economy. However, what traders should be looking out for is whether Governor Bailey will give any hints on implementing negative rates in the UK. If he does, this would be a contrast to his position a couple of months ago, which could significantly see the Cable drop.
Australia has had a fierce battle with the Coronavirus. After having initial success with battling the Coronavirus without a strict lockdown, a massive spike in Melbourne, Victoria, has caused a setback of setbacks. A trans-Tasman bubble touted to be around mid this year has been pushed back to at least March 2021. Conditions are better now in Victoria, with the state reporting its lowest increase in Coronavirus cases in three months of 28. This is, in contrast, to triple-digit growth a month ago. With National Australia Bank (NAB) posting an increase of online retail sales of 62.6%, analysts predict a rise in retail sales from 3.2% the previous month. This may provide a push for the Australian dollar higher this week ahead.
New Zealand has been relatively prosperous in controlling the Coronavirus in comparison to other countries. However, that success has come at a brutal economic cost. New Zealand has suffered a 12.2% drop in GDP, higher than Australia, and the OECD average of -7% and -10.6%. With the market pricing in a 72% probability of a rate cut next year (Source: Bloomberg), a rate cut this early will send the New Zealand dollar spiraling downward. However, market consensus predicts that rates will stay the same at 0.25%. All eyes will be on Adrian Orr, which may give a better indication for the timeline of negative rates in New Zealand.
Just some personal perspective. There has been some speculation that the reason why the RBNZ has not implemented negative rates as of yet is to get banks to get their systems ready and bee prepared when negative rates do come. Furthermore, evidence has been shown in mortgage rates. Or more, the duration of low-interest mortgage periods. A couple of months ago, banks would offer 2.55% mortgage rates for six months. However, now, banks are only offering the same quality for one year. This suggests that they are trying to lock borrowers in these rates for a more extended period to minimize remortgages' wave once negative rates come in early 2021.
Europe has faired well regarding the collaboration between the countries regarding the EU's reaction to the Coronavirus in terms of fiscal and monetary policy. With that said, individual states have had different outcomes when it comes to the Coronavirus. Pair that with countries such as Greece and Italy facing economic distress before the Coronavirus, and you have a mixed bag when it reaches the individual countries' future. PMI's measure bearish/bullish sentiment for manufacturing. A figure above 50 signals expansion, while a figure below 50 shows contraction. Consensus state that the UK is set to release a PMI of 56. While still expanding, expansion is less than in the previous month when it was 58.8. Europe is set to release a PMI of 51.7, slightly lower than the 51.9 the last month. Germany is set to release a PMI 54.2, marginally lower than the 54.4 of the previous month.
Busy week ahead as we continue to tackle the Coronavirus around the world. Stay Safe, Trade Safe.
The markets continue to grapple with the immediate effects of the Coronavirus. The second wave in pockets of the world has forced cities to take active measures to control the virus. Melbourne, Australia has gone into a secondary lockdown while Florida and Los Angeles see cases surge, with the Mayor of Los Angeles stating that the city is “on the brink” and a Democratic representative from Florida reports the outbreak is “totally out of control.” Here is your week ahead
China’s Central Bank, the Peoples Bank of China has been wary of cutting interest rates, even during the peak of the pandemic. Ma Jun, a PBOC adviser, stated in early April, “The PBOC doesn’t use its bullets all at once. China has plenty of room in monetary policy.” The PBOC has kept interest rates at 3.85%, after dropping it 30 basis points from 4.05% in April. However, forecasts and estimates expect the PBoC to keep rates as is at 3.85% this week ahead.
With 660 new cases of the Coronavirus yesterday, Japan has struggled to keep ahead of the virus after the world praised it for its lighter approach to restrictions. However, that approach, as seen similarly from Australia, has not bode well for the country. Japan has seen triple-digit daily increases for the whole month of July. This has caused consumption and spending to decrease dramatically. Analysts predict an inflation rate of 0.1%; however, there is a high chance that this may be pushed to the downside, which may put downward pressure on the JPY.
Australia is continuing to grapple with the effects of the Coronavirus, with Melbourne being put back into lockdown and the state of Victoria imposing mandatory mask restrictions. With RBA minutes earlier in the year having a tone of optimism, likely, that tone will not continue here. The second lockdown is a massive blow to the country, socially and economically. The Trans-Tasman bubble between New Zealand and Australia has been delayed, with economic activity in the state of Victoria plummeting. We may see Aussie weakness against its New Zealand counterpart as Australia reels back their reopening.
Canada continues to post double-digit daily Coronavirus cases as they, too, implemented a looser lockdown restriction like Japan and Australia. We saw a drop in the CPI from March to April as citizens decreased their spending. We saw a slight increase in the Month of May, however, analysts expect to stabilize around 137 for the month of June.
With Initial Jobless Claims posting the smallest decline since March last week, the US jobs market is showing a slight rebound. However, we are all aware of the current situation with the Coronavirus cases in the US. Florida and Los Angeles are posting daily record numbers every week, while President Donald Trump focuses on reopening the economy and the US-China trade deals. I expect this number to slowly creep up as the full effects the second wave of the Coronavirus becomes evident. Analysts predict Jobless Claims to drop to 1.29m from 1.3m previously.
We have seen this mindset in the market, which discounts negative news and rallies on positive news. This is partially due to liquidity propping up many markets. Investors and traders must take this into account when placing trades.
Melbourne, a major city in Victoria, Australia, has forced residents to re enter a six-week lockdown. This is after the major city reported 191 new cases of the novel Coronavirus, with double-digit case growth in the past couple of days.
Daniel Andrews, Premier for Victoria, stated that the new restrictions were due to the “unacceptably” high number of cases. Furthermore, he also stated that “it is simply impossible, with case rates at these levels to have enough contract tracing staff to have enough physical resources to suppress and contain the virus without taking significant steps” Furthermore, Chief Health Officer Brett Sutton stated that there was a “unanimous view” on the increase in restrictions in Melbourne. Victoria has also imposed to close off the NSW-Victoria border, with over 1,000 soldiers and police officers making their way to reinforce the border.
It is stated that a partial reason to why there has been a resurgence of cases in the state of Victoria and Melbourne in particular, is due to their opting of contracting security firms to regulate the quarantine. In comparison, this is opposed to enlisting the police force like many states in Australia and countries around the world. There have allegedly been security lapses with security guards sleeping with guests hotel guests who were staying due to a mandatory quarantine after arrival into the country.
Melbourne and its second lockdown comes back to bite critics who saw New Zealand’s lockdown overly strict in comparison to Australia, touting that Australia has been achieving similar results with fewer restrictions on their citizens. ACT party leader, David Seymour in April that Australians are being “treated like adults” by their Government and are achieving “better results.” Furthermore, he stated that “Australia appears to have its cake and eating it too, as it achieves better COVID-19 health outcomes than New Zealand with fewer restrictions on economic activity.”
However, as time has shown, New Zealand’s stricter approach has paid better dividends even with the higher initial economic cost. IBISWorld has stated that “the overall recovery of the Australian economy is expected to be significantly hindered by the second lockdown.” The state of Victoria contributed 24% of Australia’s GDP in 2019. The ASX and AUD are down 0.89% and 0.14% on the lockdown news, respectively.
We can see that the Coronavirus continues to grapple the world economically and politically. Brazilian President Jair Bolsonaro saw the Coronavirus as the “little flu” and frowned upon social distancing measures, stating, “we’ll all die one day.” He has now tested positive for the Coronavirus. He would be the second head of Government to test positive for the novel Coronavirus, with Prime Minister Boris Johnson having contracted Coronavirus earlier this year. Furthermore, with no formal Coronavirus plan, President Donald Trump administration grappled with re-opening the US economy amongst an election in September. Jacdina Adern has faced major criticism over lapses in security regarding mandatory quarantine and increases in taxes amongst significant government borrowings.
A vaccine for the Coronavirus would be required to provide stability in the economy, as countries with relatively successful Coronavirus plans are still struggling with the effects and aftermath of the virus.