The Australian Dollar has never failed to play on the back foot, always supported by a strong US Dollar and worse-than-expected wage growth data. In such a scenario, AUD/USD has fallen for the fourth successive session. This is a hint at dilemmas both at the domestic economic level and in the global market dynamics. This article looks into the reasons for this struggle of the AUD and provides an outlook of the currency.
Key Takeaways
The AUD traded poorly against the USD and reached a three-month low after the report that Australian wages grew at a weak pace.
Increased yields of US Treasuries and upbeat mood in regard to Trump's fiscal policy boosted the attractiveness of the greenback.
Global trade concerns, such as threatened tariffs and slow recovery of China's economy, contribute to AUD's woes.
Why AUD Struggles
It has been a record year, and Australian economic data has played a significant role in the AUD's recent downturn. The Q3 Wage Price Index rose 3.5% year-over-year, missing the 3.6% consensus and marking the slowest growth since Q4 2022. The weak reading of wage growth is an indicator of slowing consumer spending and broader economic activity, and it weighs heavily on the currency.
Consumer confidence, too, though lately up according to the Westpac Consumer Confidence Index, has not broken through the 100-point mark. Slightly less financial pressure is felt by families; it is clear from the tone set, though, that such sentiment has not as yet translated into strong economic momentum. Each one of these factors dissipates any optimism for the AUD.
The US Dollar's Strength: Implication on AUD Struggles
This has put the AUD under considerable pressure, considering the rallied USD. Anticipation of increased fiscal spending and inflation from the administration of Trump has underpinned US Treasury yields higher, and this in turn has supported the USD as a safe haven.
Key drivers for USD's strength include:
Strong fiscal policy anticipation, consisting of tax cuts and infrastructure investment. A possible tightening of the Federal Reserve monetary policy to counter the risks of inflation.
The divergence in the policy trajectory between the RBA and Federal Reserve has increased, adding to the appeal of the USD to investors and weakening the AUD.
Global Dynamics of Trade Intensify the AUD Struggles
These struggles with the AUD are exacerbated by global trade uncertainties. Given that China is Australia's largest trading partner, any news on its economic performance greatly impacts the AUD. Recently announced Chinese stimulus, including a 10 trillion Yuan debt package, disappointed investors and raised fears over weak demand for Australian exports.
Also, the announced or possible tariffs by Trump on China could indirectly affect the economy of Australia. Predictions of a 10% tariff for the world and 60% on Chinese imports would disrupt the flow of trade and add more downward pressure on the AUD.
Technical View: How Has AUD/USD Been Doing?
The technical positions for the AUD/USD pair continue to indicate bearishness:
The pair is at a three-month low of 0.6512, with immediate support coming in at 0.6500.
Resistance is at the nine-day EMA of 0.6576 and the 14-day EMA of 0.6593.
The 14-day RSI is still below the 50 level, which points to a bearish outlook.
Short-term technical indicators are bearish for the AUD unless a significant catalyst leads to a change in trend direction.
AUD Outlook
Despite the setback recently, the following is how the AUD can regain its lost ground:
Unexpectedly strong Chinese demand could result in Australian exports exceeding expectations on the back of commodities.
A risk from potential inflation that saw a more hawkish RBA reaction might provide temporary support.
Global trade relations, specifically US-China normalizations, could reduce some of the external pressures. Continued USD strength and persistent trade uncertainty would, therefore, be a dampener to any recovery.
Conclusion
The struggles of the Australian Dollar highlight an entwined complexity between domestic economic challenges, global trade dynamics, and a strengthening US Dollar. Weak wage growth and subdued consumer confidence are weighing heavily on AUD, while rising US Treasury yields and Trump's fiscal policies ramp up its struggles.
For now, the likely course of the AUD's recovery hinges on an economic performance by China and the direction of global trade policies. Until then, the AUD will continue to take pressure from the increasingly complex and volatile market environment.
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