- Australian dollar continues to underperform its G-10 peers.
- Outbreak of Delta variant puts Australia into lockdown.
- Australia’s recent economic growth may be fleeting.
Australian Dollar (AUD)
Spot (mid-market) rate = $0.7378 (11:05am, July 22, 2021)
Australian dollar is not having a good year. In Q1, although reaching $0.7968 – its highest level in three years – the AUD lost 1.2% vs the USD. In Q2, it lost another 1.3%, and in July its already down 1.70%. The AUD’s total decline for the year of 4.2%, underperforming most of its G-10 peers. In contrast, last year AUD gained nearly 10%, outperforming most of its G-10 peers. 1
Delta variant outbreak puts country into lockdown. New Delta variant infections show no signs of slowing, and now Australia is faced with costly restrictions as it struggles to protect a largely unvaccinated population. More than half of Australia’s 25 million people are under lockdown.2
Economic recovery may be short-lived. Australia’s economy expanded in Q1, but analysts predict it will stall in H2, as declines in economic activity are expected due to recent shutdowns in Australia’s largest cities – Sydney and Melbourne. CNN commented “Sydney in lockdown, borders shut and hardly anyone vaccinated. How long can Australia go on like this?”3
Several factors are influencing the value of the Australian dollar:
Economic growth may stall. Australia’s Q1 GDP expanded 1.8% QoQ after upwardly revised +3.2% growth in Q4 and beating market expectations of +1.5%. On a yearly basis, the economy grew by 1.1%, above pre-pandemic levels.4 Nevertheless, recent data indicates weakness ahead:
- Retail Sales disappoint. June’s decline of 1.8% was worse than consensus of -0.7% and below May’s +0.4%. It was the first drop since January and reflects June’s lockdowns in Victoria and New South Wales.5 With half of Australia in lockdown, July could also register a decline.
- Social mobility in decline. Google’s Mobility Change data for Australia updated through July 17 shows large mobility declines -- in visits to restaurants, shopping centers, national parks/beaches and the use of public transportation. 6
- Economists predict a weak economy post-pandemic. In a recent forecasting survey of leading Australian economists, Australia’s economy will “limp along after recovering from the pandemic and fail to regain the growth it had leading up to the crisis or the much higher growth in the decades before.” 7
- Support from iron ore may wane. Australia is one of the world’s top producers of iron ore, an important raw material for making steel. After peaking in May at a record $230 a ton, prices of iron ore dropped dramatically. Government officials now predict the price will fall to $63 by April of next year after supply held up in Brazil comes back online. 8 In the short-term, however, iron ore prices should remain firm amid strong demand and supply shortages.
Reserve Bank of Australia (RBA) keeps rates low but plans to taper its asset purchases. At its July 6 meeting, the RBA kept its cash rate at all-time low 0.10%, stating that stimulus remains necessary and rate hikes would be a long way off. Nevertheless, it opted against pushing out the horizon of its yield target, while extending its asset purchase program but at a reduced level – from A$5Bn to A$4Bn per week effective September 9 – which analysts consider as slightly hawkish signals.
Less than 12% of Australia’s population is fully vaccinated. In late June, the OECD published a report that ranked Australia in last place among 38 countries in “Percent of total population fully vaccinated” (at the time 7.8%) against Covid-19, which experts attribute to Australia’s flawed vaccine strategy. 10
Australia accuses China of cyberattacks. Last week, Australia joined the US and other allies by officially accusing Chinese government-linked hackers of ransomware attacks.11 This may escalate the tensions between China and Australia which began last year. This is significant, as China is Australia’s top trading partner.
TECHNICALS: The long-term uptrend in the AUD/USD – in place since May 2020 – remains intact. Despite several trend indicators leaning towards further weakness, only a solid move below last November’s low of $0.70 would change our bullish view, and we put low odds of that happening. In the meantime, expect trading to consolidate in Q3 within a wide $0.7250-$0.7550 range, before the currency pair resumes its secular uptrend.
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