Aussie Under Pressure

The Australian Dollar is coming under heavy selling pressure this week as a combination of internal and external factors weigh on investor sentiment. Firstly, the recent RBA rates pivot has opened up clear monetary policy divergence between itself and other central banks, such as the RBNZ, ECB and BOE, which are still firmly ensconced within more aggressive tightening cycles. The RBA cut rates by a further .25% this week and, while further rate hikes were signalled, the outlook is nowhere near as hawkish as it is towards the RBNZ for example. Indeed, since the RBA began pivoting on rates AUDNZD has fallen more than 8% and looks prone to further downside in the near-term.

China Covid Impact

Added to the Aussie's woes are the ongoing issues in China. With lockdowns and various other covid restrictions having returned over the last two months, trade with Australia has been heavily impacted. The latest Chinese trade data, released overnight, showed that imports were down sharply in October. With Australia already suffering via increased trade levies and various embargos, the tumble in Chinese demand recently is a poor omen for the Australian economy. Looking ahead, although there is growing hope that China is steadily moving away from its zero covid policy, with infections still soaring there, risks have not yet been unwound and restrictions can be stepped up again at any time if deemed necessary.

USD Resilience An Issue

Resilience in the US Dollar is also proving an issue for the Aussie. The Fed has so far held off from pivoting on rates and while expectations have recently built up in favour of the Fed slowing the pace of hikes from December, the latest US jobs data suggests that a pause is still some way off. Indeed, with jobs and wages broth rising sharply last month, the fear is that a fresh move higher in inflation might see the Fed stepping up the pace of tightening again which would send stock and commodities prices plunging, weighing sharply on AUD.

AUD Outlook

Looking ahead, the outlook for the Aussie remains highly vulnerable to further losses in light of the factors discussed above. However, as we move into Q1 2023, upside risks should return. As other central banks complete or near the end of their tightening cycles, monetary policy divergence will erode. Similarly, if inflation begins cooling sharply in the US and the Fed is able to pause on rates ahead of current projections, this will be firmly bullish for risk assets, helping lift AUD. Additionally, as China does eventually abandon zero covid, this again will help boost the Aussie.

Technical Views

AUDNZD

The sell off in the pair has seen the market breaking down through several key support level following the break through the rising trend line. Price is now fast approaching a test of the 1.0478 level. With momentum studies bearish and retail traders heavily long, the focus is on a continuation lower with 1.0324 the next big target after 1.0478. To the topside, outlook remains bearish below 1.0954.