By Giles Coghlan, Chief Currency Analyst at HYCM
Technicals and fundamentals point to May as a bearish month for the AUD
The Australian dollar started the week falling on the changing risk tone from last week. It was the escalation of the US-China trade war rhetoric from the US and finger pointing at Wuhan for the alleged release of the coronavirus that spooked the markets. The prospect of a COVID19 battle in tandem with a US-China trade wad led to a risk off tone coming into the market and landing with a thump of on Monday. None of which helps the high beta AUD. The picture has changed a little this am with the US administration signalling that they are not targeting China as long as they stick to January’s trade negotiations.
With that being said, the fundamentals were still weak for the AUD.
Fundamentals are weak
- Firstly, the rating of Australia’s AAA rating is at risk as the S&P rating’s agency has warned.
- Secondly, Australia’s terms of trade hit the worst level last week in more than three years.
- Thirdly, according to the International Monetary Fund’s PPP metrics, the AUD is the fourth most expensive currency in the world.
- Fourthly, Real yields in Australia are looking to be deeply negative removing a long term support for AUD.
- Finally, after nearly three decades without a recession a great deal of excess will be removed in one of the first economic shrinking in a generation.
The seasonal pattern for the AUD is also weak. Over the last 10 years it has an average 2.33% decline in the month of May.
Therefore, the outlook for the AUD looks weak for May, in particular against the dollar which stands to gain on any safe haven bids due to risk aversion.
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