The iron grip dragging AUD lower likely to persist
Since March, AUD has been on a slide and for a very good reason – prices of iron ore, one of Australia’s key exports – have been losing ground at a steady clip.
Should the retreat continue, AUD/USD faces the prospect of testing support levels just below 0.7200. Meanwhile, iron ore prices have fallen from around $90 per tonne in March to around $57 at the beginning of June. With another 180 million tonnes of low cost production due 2016-2020 more price weakness is expected with around 2 billion tonnes of output globally in 2015, according to Unctad. Some analysts are expecting prices to slip below $50 and if that’s the case, AUD is likely to faithfully mirror the fall.
China, meanwhile, which is a big iron ore buyer has loads of it piling up in its warehouses and its economy seems to be destined to gradually slow as its population ages, its economy matures and as it shifts away from manufacturing exports towards consumption.
The other factor, hurting AUD/USD is the narrowing yield gap between US and Australian bonds and interest rates with the US Federal Reserve in tightening mode. Meanwhile, recent Australian economic data has been on the softer side.
However, with a growing negative bias building up towards AUD – many large speculators have bailed out of the currency – could it be that it is nearing a bottom? Whether support just above AUD/USD 0.7300 holds will be telling.
When sentiment turns very negative, a rebound usually isn’t far off, and it’s possible that a short-term one could be in the wings. However, iron ore prices, are likely to be more decisive in the longer run than swings in speculative sentiment as the raw material retains its iron grip on AUD.
TECHNICAL ANALYSIS: AUD/USD looks set to fall further
Since around March 20, AUD/USD has been working its way lower with the characteristic lower lows and lower highs. There’s not a great deal to suggest that this trend is about to change from a technical perspective and also the pair have been consistently below the 200-day moving average since late April.
Notwithstanding the counter rally on Friday, AUD/USD looks set up to make further losses with the daily RSI giving a very neutral reading of 48.00 and the pair currently sit around the middle Bollinger band. A push up to 0.7465-70 and maybe even 0.7373 is possible, but the overall trend still looks bearish.
Support is placed at 0.7373, 0.7341 and 0.7331. The big numbers that really matter are 0.7341 and ultimately 0.7160. Meanwhile, resistance can be seen at 0.7465, 0.7506-16 and 0.7536 and 0.7593
By Justin Pugsley, Markets Analyst MahiFX