AUD/USD exchange rate impact on the Australian economy

In the span of merely 3 months, the Australian Dollar moved more than 10% to become the second best performing major currency after the Euro. The persistence of the AUD/USD bullish trend is outstanding and it’s in part driven by the market appetite for the carry trade, as well as the anti-dollar carry appeal.

Even the RBA was forced to respond to the recent Aussie strength and lowered its GDP forecast down to 2.5% economic growth rate versus the 3% previous update. The Australian economy is falling behind and remains out of sync with the other major economies which indicate that there are other factors that drive the AUD/USD exchange rate higher.

FX Futures performance 2017

FX Futures performance 2017

Australia Economy – Fundamental Outlook

The Australian economy has seen a sharp acceleration in some of the most important areas, but this couldn’t help boost the GDP for the second quarter of 2017 which missed the market expectation. The economic growth slowed down to 1.7%, the lowest GDP reading in nearly 4 years.

Australian GDP Annual Growth Rate

Australian GDP Annual Growth Rate

The Australian economy relied on the mining boom in exports to China for a very long time, but it’s gradually shifting away from mining. The economic outlook has been boosted by the recent rise in the commodity prices and renewed Chinese demand.

The Australian Unemployment rate disappointed in the beginning of the year, rising to 5.9%, but it gradually started to move lower and now it looks stable at 5.6%. The inflation is slightly lower, a bit under what the RBA wants it to be, but it’s on track to reach the 2%-3% RBA inflation range.

The downside risk to the Australian economy remains the housing market, which according to many analysts can be on the verge of collapsing if the RBA hikes rates too soon and too fast. So far, the RBA has kept rates on hold and didn’t do much in comparison to their counterparts like New Zealand who have already raised interest rates.

The RBA is expected to keep rates unchanged in 2017, as the RBA rhetoric about the stronger AUD/USD exchange rate would complicate the transition away from mining, which in turn it would make it harder for the RBA to change its interest rate policy.

AUD/USD Exchange Rate Outlook

The AUD/USD exchange rate has been stable the whole year, but since the beginning of the summer, it has started to pick up in part due to the rise in commodity prices, and secondly due to the broad-based dollar weakness.
Going forward, as the global economic landscape changes, the Aussie exchange rate will be more driven by the global market and the risk-on/risk-off environment.

The AUD/USD technical pattern remains bullish as clearly indicated by the daily uptrend. However, as long as we stay below the big psychological number 0.8000 the risk increases for a much deeper correction.

Recent AUS/AUD uptrend

The short-term trajectory for the AUD/USD remains broadly flat as long as the current consolidation which has been in place since the beginning of August persists. According to FX-Australia, only a break below the August low of 0.7800 can confirm the reversal and only a daily break and a close above 0.8000 can reinvigorate the bullish trend.

Conclusion

The risk remains skewed to the downside for the AUD/USD exchange rate in the event of broader risk aversion, which is a market theme that has potential to disrupt the market volatility. This scenario is more likely to play out as the recent spike in US stock market volatility can be the catalyst for a broader correction in the equity market, which can have a negative impact on the Aussie exchange rate.

What keeps the AUD/USD exchange rate elevated is mainly the rise in commodity prices such as Gold and Iron Ore while the USD weakness plays a small role too. These two markets both are have extreme overbought/oversold status, which means that it is only a matter of time before we see the trend snap back, and with this, pull the AUD value down again.

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