AUD / USD has obstacles to overcome

Aussie, AUD / USD, China, RBA, Fed, Yield – Fourth Quarter Fundamental Forecast

  • Australian dollar depreciates against US dollar by the end of the third quarter
  • Bad news could be priced in AUD / USD, but that could change in Q4.
  • Commodities, US dollar, yield spreads, delta and China can all play a role.

Read completely Australian dollar forecast, including a technical overview, download our new 4Q Trading Guide from DailyFX Free Trading Guides!

Third quarter results – consolidation of the AUD / USD pair

The Australian dollar made a new year low in the third quarter. Reasons for weakness include falling prices for iron ore and other commodities,China’s uncertainty, the spread of the Covid-19 delta variant, the strength of the US dollar and interest rate differentials, among other factors.

China’s shared prosperity policies continue to influence

The Chinese Communist Party (CCP) has ruled that Chinese steel mills should produce less steel in the second half of 2021 than they did in the second half of 2020. It is still close to the 2020 highs this year. There is potential for the price to fall further, but perhaps not by much.

Iron ore prices around $ 70-80 per ton are changing dynamics as other producers become unprofitable near these levels. This creates a potential floor for iron ore prices. Australia’s baseline mining costs are US $ 20 per tonne, which is difficult to replicate due to the scale of the infrastructure required.

China has taken tough measures against various sectors of the economy and is likely to continue to do so, pursuing its policy of “common prosperity”. This could undermine confidence and risk appetite in the markets, negatively affecting the Australian dollar. However, the Evergrande episode showed that the CCP would intervene when necessary to protect any material weakness. The worst regulatory requirement could be left behind.

Unlocking the economy

Transition to 4th Most of the Australian economy is locked in the fourth quarter. New South Wales will pull out of stay-at-home orders in October, with other states joining them once they meet their vaccination targets. When this happened in 2020, economic activity increased significantly.

Central Bank actions will have implications

The Federal Reserve has indicated that the number of monthly bond purchases will decline, and this will likely be announced at their next meeting in November. US rates are expected to change no earlier than next year.

The RBA tightened monetary policy in the third quarter, cutting its bond buying program from AU $ 5 billion a week to AU $ 4 billion. They said they would continue at the same pace until February 2022, with interest rates being held indefinitely.

The difference in 10-year Australian and US government bond yields has historically been strongly correlated with AUD / USD. In the third quarter, the difference was 18.5 basis points in favor of the US yield, but it is now approaching parity, supporting the Australian dollar.

There may be some unknown risks in the fourth quarter, possibly linked to China or another Covid-19 mutation, but if the Australian economy emerges from lockdown, the Australian dollar could be in favorable conditions.

Chart – Difference in the yield of 10-year government bonds AUD / USD and Australia / USA

Australian Dollar Fundamental Forecast for Q4: AUD / USD has hurdles to overcome

Diagram cpublished on TradingView

Read completely Australian dollar forecast, including a technical overview, download our new 4Q Trading Guide from DailyFX Free Trading Guides!

— Written by Daniel McCarthy, Strategist at DailyFX.com

To contact Daniel, use the comment section below or @DanMcCathyFX on twitter



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