The drivers behind the Australian Dollar’s rocky depreciation during Q3 mostly revolved around ongoing global trade disputes and widening interest rate differentials in the United States.
Market fears were elevated over a tit-for-tat tariff battle between the U.S. and China adversely impacting global growth, emerging markets and export-dependent nations. With China accounting for almost a third of Australia’s exports, any possible slowdown in economic momentum represents a threat to demand for Australian commodities. While trade tensions were a significant drag on the Aussie, rising interest rates elsewhere compounded to downside pressures. With the Federal Reserve on a path towards gradually normalizing monetary policy and the Reserve Bank of Australia (RBA) maintaining a “wait and see” approach, the AUD remains a victim of widening interest rate differentials.
As we head into the final trading quarter of 2018, the Australian Dollar is likely to remain impacted by global trade developments, the Dollar’s performance, monetary policy and commodity prices.
The AUD remains at threat of depreciating further if escalating U.S.-China trade tensions transform into a full-blown trade war. Such an unfavorable development may trigger global risk aversion, punish export reliant nations and pressure commodity prices – all of these are negative for the Australian Dollar. While the domestic conditions in Australia have improved with growth expanding at the fastest pace in 6 years during Q2 at an annualized 3.4%, the nation still remains in the firing line of trade disputes. With anemic wage growth and subdued inflation at home providing a solid argument for the RBA to leave interest rates unchanged at the record low of 1.50%, the Australian Dollar’s outlook points to further downside.
With Australia being the world’s second largest producer of Gold, investors should keep a close eye on the yellow metal which tends to be positively correlated with the Australian Dollar. The past few trading months have certainly not been kind to Gold prices and this may impact the Australian economy during the final trading quarter of 2018. With the zero-yielding metal currently entangled in a losing battle against the Dollar and Fed hike expectations, the Australian Dollar seems to be instore for more pain and punishment down the road.
In regards to the technical picture, the AUDUSD respected a bearish trend during the final trading quarter of 2018 with prices sinking to levels not seen in over two years below 0.7100. With the Aussie’s weakness the product of trade tensions, widening interest rate differentials and falling Gold prices, the AUDUSD remains bearish fundamentally. A monthly close under 0.7150 could inspire a decline towards the 0.7000 psychological level and possibly 0.6820.
There have been consistently lower lows and lower highs on the weekly charts while the MACD remains firmly planted to the downside. For as long as the AUDUSD is unable to break back above the 0.7330 level, prices could challenge 0.7150 and 0.7000, respectively. Zooming into the daily timeframe, the AUDUSD experienced a technical rebound towards the 0.7310 region before bears dived back in to send prices lower. A solid daily close below 0.7200 could be the catalyst needed for a further selloff towards 0.7150. If the downside momentum shows no signs of cooling, prices are likely to test 0.7090. In an alternative scenario, a breakout back above 0.7450 needs to be achieved to invalidate the current bearish setup.
