We are heavily bearish of the AUD and in our last post, we noted that due to the large speculative short position a bounce was likely to take speculators out on stop which in our view has now occurred. We expect the downtrend to continue, our view of the fundamentals, sentiment, and technicals below.
Global Growth and Commodity Demand to Slow – Bearish AUD
China is Australia’s biggest export partner and world’sbiggest commodity consumer and its economy is now slowing up and global economic growth has peaked. This is bearish for the AUD due to the fact that its highly sensitive to the outlook for global trade and economic growth.
Iron Ore Australia’s Biggest Going Down
Australia’s biggest export is iron ore contributing 50% of all export revenue and its has seen a big fall and more downside is expected. Demand is falling and China is also switching to using scrap and looking to buy iron ore from other countries which will weigh heavily on the AUD.
The Surge in Power Prices and Coal
Iron ore has sold off to the downside and more bad news is coming for Australia as coal prices look set to fall after a huge surge to the upside:
In terms of coal: “It is the perfect storm, prices are galloping due to China’s heatwave, shortages with Coal India and power plants, high freight rates, increased appetite in the rest of Asia, tightness due to Indonesian rains, Hurricane Ida in the U.S., and in general a supply crunch,” (Puneet Gupta, founder of Indian coal marketplace Coalshastra)
The rise in coal prices won’t last and forecasters see no end to the bull run and we have found no forecasters who ARE bearish which is the same when iron ore peaked and crashed. All bubbles end and coal will do the same.
Commodity prices have more downside over the longer term and this will pressure the Aussie. On the other side of the pair, the USD is oversold and will mount a broad-based rally. Longer-term the interest rate outlook favors the US over Australia. Finally, if we were to see a correction in global equities this would give the USD an additional boost on its safe-haven status.
On the weekly chart, we can see the big 0.7500 level and 20-week moving average has held the rally and we are now looking for a move down to 0.700. On the daily chart, we view the AUD as a sell with stop protection behind second-level resistance.
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