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AUD/USD Prime for 0.80c?

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.

AUD/USD looking to hit 80c

Technical are looking positive for the AUD/USD

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?

Fundamentals looking strong

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.

Dollar continues to lose ground

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?

Is the Australian dollar set to fall on a Biden win?

We are 13 days away from the election. Many polls state that Biden is winning the votes – however that’s what happened in the 2016 election. With big banks citing a decline in the Dollar over a Biden win, what will happen to commodity currencies such as the Australian Dollar and the Canadian Dollar against the US Dollar?

The Australian Dollar against the US Dollar has had a strong comeback, up 30% from its March lows. This was due to Australian commodity prices such as copper, nickel, and iron rebounding as manufacturing restarted worldwide.

Australian Dollar against green policy

If Biden were to be re-elected, a risk to the Australian Dollar is his supposed $2 Trillion push for a greener future, pushing initiatives that would create the opportunity cost for using cheap power sources such as oil and coal as supposed to greener alternatives such as solar and wind, lower. A report by BloombergNEF showed that the “Levelized cost of electricity for onshore wind projects has fallen 9% to $44 megawatt-hour since the second half of last year… with solar [declining] 4% to $50 a megawatt-hour”. They also cite that prices are lower in countries such as the United States, China, and Brazil, and that “Best in class solar and wind projects will be pushing below $20 per megawatt-hour this side of 2030”. This is not good for commodity currencies such as the Australian Dollar and the Canadian Dollar, as they are notoriously known to sell off when green policies are enacted.

Australian Dollar against the US Dollar may be bracing for a fall come election time in the US

Therefore, it is likely that the Australian Dollar will sell off if Biden is elected. Given a predicted selloff too in a US dollar, we may see the pair make a violent move to the downside. Near the end of September, we saw a selloff in the pair, retesting that healthy 0.7 support level. The AUD/USD has been ranging ever since between the 0.7 and the 0.725 marks. However, a Biden win may see the currency pair down to 0.6925, a historically strong support/resistance level, and a full Fibonacci retracement from 0.74 to 0.6925.

Are you looking at the Australian Dollar?

Is the future for the Australian dollar downwards?

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.

Australian Dollar selling off in the past couple of days

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.

Is this a long term trend for the Australian dollar, or just Market Volatility?

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.

Australian dollar to 75c?

The Australian Dollar has seen a strong bull rally - up 12% from its March lows. Now bulls are edging for the currency to push higher.

AUD/USD slowly creeping up to that 75c mark, not seen since May 2018

A possible push of the Australian dollar to 75c against the U.S dollar is a level not seen since May 2018. During that period where it first dipped below 75c, there were many retests in the following months before we finally saw a sold push below the 75c mark. This historical dynamic may require bulls to have strong momentum if they want to pass that 75c mark.

The Australian Dollar is noted for being a commodity currency – that is, the value of their currency against other currencies is mainly correlated from the price of commodities they export. You can see this correlation with the price of Iron and Copper.

That 12% push from its March low has been due to its largest export partner, China, seeing their demand for Australian resources sour amongst the Coronavirus pandemic and their souring relationship regarding barley and wine exports.

Australian Dollar underpinned by Commodity Demand

When put side by side, the correlation between Copper and the Australian Dollar is clearly visible.

Australia’s Minister for Resources, Keith Pitt told the Financial Times in a recent interview that the mining and energy sectors were underpinning the domestic economy, which has been battered by a second wave of the Coronavirus that has forced many businesses in Melbourne to shut their doors for another couple of weeks. He also states that “62% of China’s Iron ore imports came from Australia in 2019-2020,” reiterating that commodity correlation.

However, more institutions are bullish on the Australian Dollar. Notably. Commonwealth Bank of Australia stated that “the recent rally in some commodity prices seem unstoppable,” hinting at the idea that commodity prices are an essential driver of the Australian Dollar.

It also helps that over the past couple of weeks; there has been a trend of de-dollarisation amongst traders and investors. This may be due to a mix of factors, including a 34% rally in Gold, unprecedented fiscal stimulus and quantitative easing, and a strong rally in U.S equities forcing investors and traders out of the U.S dollar.

If we continue to see strong demand for commodities such as Copper and Iron, we may see both the Australian Dollar and the prices for those rally in tandem together.

Speaking of Copper – a senior analyst here at BlackBull Markets, Anish Lal did an excellent technical overview video on whether copper will hit 80c – You can watch it here.

Safe trading!

RBA decision: What to expect?

"RBA would hold the cash rate steady at 0.25%, " analysts at Wespact predict. 

Is there a possibility of a rate cut?

What are we to expect with RBA’s decision today? On the back of two rate cuts from 75 to 25 basis points, the focus remains to be on the outcome of the Coronavirus. Australia’s current figures stand at 6,825 confirmed cases with 95 deaths, an implied fatality rate of 1.39%, one of the lowest in the world. The real test, not just for Australia, but for the majority of countries who have had strict lockdown restrictions is following weeks after lockdown is lifted. A possibility of a second wave may force governments to implement stricter lockdown procedures, all but destroying short term economic recovery. This may spur the RBA to cut rates even further or increase their daily purchases in government bonds. 

However, there are tentative signs which point to the RBA leaving rates as is. Firstly, they have reduced their daily purchases in Australian Government Bonds from $4-5 Billion a day an average of $750 Million. This may imply that they are giving themselves some breathing room and firepower just in case the Coronavirus outlook gets worse once businesses return to normal, stating that “If conditions warrant it, we will return to daily bond purchases.” A similar rationale could be used to predict whether or not they cut rates later today. 

The immediate due to the Coronavirus is predicted to be around $50 Billion AUD, seeing GDP plunge 10% in the June quarter according to Treasurer Josh Frydenberg.

RBA's Interest rate against Unemployment Rate

The Reserve Bank of Australia has a mandate of achieving full employment, ensuring the stability of the currency and the economic prosperity of the people of Australia. Philip Lowe, Governor of the Reserve Bank of Australia, stated that he was “confident that our economy”; however, he further emphasized that the “unemployment rate will remain above 6%” over the next couple of years. He also cautioned against “returning to business as usual” as it would “cast a shadow” over the Australian Economy. This suggests a prolonged period of low rates until they are on track to achieve their full employment target of 4.5% again.

Potential upside for the AUD?

We should expect some volatility around the time of the RBA’s decision. As analysts forecast no rate changes, all eyes are on the RBA’s forecast for the Economy. A better than expected forecast may push the AUD to the upside, on the back of geopolitics between the United States and China pushing the AUD down, which Anish Lal explained in an excellent video here.  

 An abysmal US Retail Sales figure of -8.7% for March, all eyes are on the release of Q1’s Retail Sales figure for Australia, as it may give some insight on the potential damage the mandatory closures of retail stores have been.

 Talks to reopen borders between Australia and New Zealand

With New Zealand reporting an unprecedented zero new cases on Monday alongside Australia having one of the lowest fatality rates, talks between both governments on reopening borders between countries have started. This may help boost the shattered tourism industry in New Zealand, while slowly spurring demand in both countries and giving some slight relief, if any, to airlines. But Prime Minister Jacinda Ardern warned that there would be much work required to make a “Trans- Tasman bubble” safe and hinted that would not be such a bubble in the shorter term.  

 News of the bubble being implemented would bring significant tailwinds for both the NZD and the AUD. If all goes to plan and the coronavirus outlook after the bubble has been implemented remains stable, the chances of the RBA's decision of leaving rates as-is will drop significantly.  

Phliip Van Den Berg, an analyst here at Blackbull markets has some excellent technical analysis on the AUD/CAD pair in light of the RBA’s decision later today. You can watch the video here.

A pair for the recovery

What currency pair is poised to bounce back in the recovery? Since the start of the Coronavirus, the Australian Dollar has depreciated sharply against the US Dollar. However, history has shown to repeat itself in regards to economic shocks and this currency pair.

AUD/USD Pair, Weekly Candles

During the 2008 Financial Crisis, the AUD/USD pair followed a somewhat explainable trend – it depreciated at the peak of the recession and appreciated once economic activity and the recovery started in mid-2009.

AUD/USD,  Weekly Candles

Whats the big driver for the Australian Dollar?

The Australia Dollar has been considered by most as a commodity currency – in that it tracks the price of the commodities it exports – mainly iron, copper, and coal. In economic downturns like the one we are currently facing and 2008, manufacturers who use iron and copper tend to slow down their production or halt it together. Lower demand for iron and copper not only implies a lower price for said commodities, but it also means fewer exports from Australia, therefore less demand for the Australian Dollar.

AUD/USD against Coal over 10 years
AUD/USD against copper over 10 years
AUD/USD against Iron Ore over 10 years

If we take into account that investors tend to decrease their exposure in risky assets and safer assets such as the US Dollar, Treasuries, and Gold, there is a compounding effect on the AUD/USD as there is less demand for the AUD and an increase in demand for USD.

Is the road to recovery in sight?

The thesis of a long AUD trade hinges on one fundamental question – do we see a recovery in sight? A difficult question, as it implicitly asks to predict a bottom in the stock market, productivity, and in this case – the effects of the Coronavirus. Signs of an economic recovery are showing, albeit tentatively. Countries are slowly emerging out of lockdown, oil inventory buildup in the United States was 2.7m less than predicted, and there have been talks of creating “mini bubbles” with countries. But, if we take a look historically at what the market movements have been in the previous recession.

SP500 during the 2008 Recession
SP500 during the current Coronavirus pandemic

A similar pattern emerges

After the initial drop in 2008, there was a short bull period before another further drop in prices in early 2009. A similar pattern can be seen in the 2000 – 2005, following major events such as the dotcom burst, the September 11 attacks alongside the further correction in 2002. If history repeats itself, we may likely see a similar pattern in the following months. Talks of a “second wave” of coronavirus cases, alongside earnings season and muted demand across all sectors may be the catalyst for a drop asset prices.

It is clear that the AUD/USD pair appreciating is contingent on manufacturers dependent on their exports restarting production. An implicit proxy for this is the directional trend of the market. As stated above, history shows that there may be another depreciation in the Australian Dollar and the market. However, history also shows that once manufacturing activity does restart, the Australian Dollar is likely to appreciate. Furthermore, headwinds for the Australian Dollar include extensive quantitative easing and expansionary fiscal policy in the United States, which has historically driven the US dollar down.

Is it time to think about a position in the Australian Dollar?

Here is Anish Lal on his short term analysis on the recovery of the Australian Dollar and the ASX in light of geopolitics. Watch the video hereOr alternatively, click the thumbnail below,