China and the Fed taking the wind out of AUD
When China sneezes Australia catches a bad cold – at least that's the thinking in the forex markets, which explains why AUD has had such a bad mauling recently and its troubles could be far from over.
Such is the sensitivity of AUD to bad news at the moment that even a successful attempt by New Zealand's central bank to talk down NZD had a knock-on effect on the Australian currency.
There are two key factors driving AUD/USD at the moment. The first is the growing evidence of a slowdown in China's economy and secondly the US is in the process of normalising its monetary policy.
If those two trends continue to play out AUD/USD could soon find itself around 0.77 or even 0.70 over the next three to four months. The next big test of support will be around 0.8660. In fact AU/USD could consolidate around that level before resuming the downward slide.
AUD/USD – The great unwinding of the carry trade
China's economy moving towards 'moderate' GDP growth
The Chinese economy seems to be losing steam, which has been reflected in oil and iron ore prices – the latter being a key export for Australia. Also, China is Australia's biggest market. China's economy is no longer growing at 8%+, it is currently around 7.5%, but that could slip to around 7% next year.
However, AUDUSD could still rebound strongly – if Chinese policy makers decide to put in place a major economic stimulus plan. If it is focussed on infrastructure, that would be great news for Australia, AUD and the prices of the many metals it exports. However, it may go for a consumer type stimulus instead, which would probably benefit Australia less, though it would still provide some support to AUD.
The other factor is that the US Federal Reserve is due to stop its quantitative easing programme next month and will possibly raise interest rates within H1, 2015. Australia meanwhile is looking to rein in government spending, which should act as a break on economic growth and monetary policy. In other words AUD is rapidly losing its attraction for the buy side of carry trades, which have been an important factor behind its strength over recent years.
By Justin Pugsley, Markets Analyst MahiFX