The Australian Dollar has taken quite a beating this week; the AUD/USD tumbled to a 4-month low of $0.6422. The sharp slide lower came after disappointing Q3 GDP figures showed that Australia's economy grew by just 0.3%, well below market consensus. Annual growth slowed to 0.8%, levels rarely seen outside recessionary periods. Meanwhile, growing economic weakness only added to speculations of a sooner-than-expected rate cut by the RBA, knocking up the bearish sentiment for the Australian Dollar. With rising tensions on home ground as well as internationally for the currency, technical signals do point out that the AUD/USD pair may well see some downside risks in due course of time.
Key Takeaways
AUD/USD plunged to 4-month low of $0.6422 following weaker Q3 GDP numbers
Market expectations of RBA rate cut now shifted to April impacts the bond yields and AUD Sentiment.
Technical analysis indicates the possible downside toward $0.6400 and $0.6350 supports.
The recent situation between the US and China and Federal Reserve decisions will provide clear near-term direction to AUD/USD.
AUD/USD Drops Below Support - What Drives the Pair Lower
Miss in GDP, Weakness of Economy
The recently released figures by the Australian Bureau of Statistics hint at the economy experiencing a concerning slowdown. There was no progress in private demand and neither in consumer spending. Had there not been the 2.3 percent boost to government spending, probably the country's economy would have slipped into a technical recession.
Economists had expected a 0.4 percent quarterly increase in GDP, but the unexpected growth of 0.3 percent has rung alarm bells on Australia's economic resilience. The soft data strengthens the case for monetary easing, said Marcel Thieliant, head of Asia-Pacific economics at Capital Economics.
Rate Cut Speculation Heats Up
The soft GDP number had prompted markets to bring forward the timing of an expected rate cut, with the first RBA rate reduction now seen as early as April, versus May previously. The chances of a 35-basis-point cut in May have jumped to 28% from before the GDP release, according to Refinitiv data.
This has trickled down to bond markets: Australian 10-year yields fell to a six-week low of 4.257%, while three-year bond futures gained, further reflecting expectations for monetary easing.
China's Economic Struggles and AUD's Proxy Role
The Australian dollar is particularly at risk from any setbacks in its largest trading partner and often acts as a proxy for China's economic health. The Caixin Services PMI unexpectedly slipped in November, adding to fears of a fragile recovery in the world's second-largest economy.
Adding to the pressure, the US has imposed new export controls on China's tech sector and fears of an escalating US-China trade war persist. All these factors weigh heavy on the AUD/USD pair and further dent the Australian Dollar's stability.
AUD/USD Technical Analysis: Breaks Support
Key Levels Broken and What They Mean
Having broken lower through the key support at $0.6440-the lowest level since last August, AUD/USD has confirmed a near-term bearish trend, finding immediate downside targets at $0.6400 and $0.6350, respectively. For the remainder, the year-to-date low around $0.6349 will become critical support. Below the key support, the sell-off is likely to accelerate further, which could open upsides for a deeper correction lower.
Bearish Technical Indicators
Technical oscillators are in negative territory, such as the RSI, but not at an over-sold position, a situation that provides ample leeway for further decline. Moving averages further confirm the bearish scenario, too, with prices trading comfortably below the 200-day and 50-day SMAs.
Resistance Levels for Possible Recovery
Any attempts to recover are likely to meet with some strong resistances around $0.6500 and $0.6540, while confluence from the 200-day and 50-day SMAs will lie around $0.6630. The price needs to go above these to reverse the short-term bias in the hands of bullish traders.
Broader Market Implication
Effects on Bond Yield and Investor Psychology
Investor concern is underscored by the bond market's reaction to Australia's weak GDP report. Falling yields reflect expectations of looser monetary policy, while rising bond futures indicate a flight to safety. But the RBA's cautious stance on inflation, along with the prospect of rate cuts, has further dented investor confidence in the Australian Dollar.
New Zealand Dollar Performance Compared
Things have not been very easy for the New Zealand Dollar either, but the latter's fall has been cushioned by the good performance of dairy prices. According to ANZ, its commodity index rose 2.9% m/m in November with butter prices at record highs. Relative resilience against the AUD's struggles underlines the role of sector-specific factors in currency performance.
What Lies Ahead for AUD/USD?
Prospect of Rate Cut and Market Expectations
The cautious view of the RBA keeps participants on hold until further data prove the need for monetary easing. Ongoing soft readings, however, would probably cement expectations of an April rate cut and further weaken the AUD/USD pair.
Still, the RBA will in all probability refrain from making any moves during the December meeting as well and stick to the wait-and-see approach because inflation remains sticky.
Global Factors to Watch
The broader trajectory for the AUD/USD pair will depend on broad factors. Policy decisions of the US Federal Reserve, economic recovery in China, and geopolitical tensions on trade and technology may affect the given pair. A speech that Fed Chairman Jerome Powell is set to deliver and the US Nonfarm Payrolls report are other scheduled events that may give clues on the USD's strength vis-Ã -vis AUD.
Conclusion: AUD/USD at Crossroads
The break lower in AUD/USD below pivotal support was indicative of both domestic weakness and global uncertainty aligning. Failure of GDP combined with increased expectations for RBA rate cuts simply solidified the bearish bias on the Australian Dollar.
Though indications are towards more downside, action from coming global events and economic data will decide further course. Traders can be very cautious as AUD/USD pair is prone for higher volatility in the short term.
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