Aussie tumbles on risk aversion
The Australian dollar is stable on Tuesday, after starting the week with a nasty drop of 1.83%. AUD/USD has dropped to its lowest levels since July 2020, as it trades around 0.6970.
Risk aversion remains high, as investors see dark clouds all around. Soaring inflation, supply chain disruptions, a hawkish Fed, the Ukraine war and a slowdown in China have boosted the US dollar and sent risk currencies like the Australian dollar sharply lower.
China, the world’s number two economy, is stubbornly sticking to its zero-Covid policy, putting hundreds of millions of residents under lockdown and disrupting factory production and global supply chains. Perhaps no country is feeling the deterioration in China more than Australia, as the Asian giant is Australia’s largest trading partner. Last month, the IMF recently cut China’s growth forecast to 4.4%, down from 4.8%. The property sector hasn’t been in the headlines lately, but the severe leverage problems which have affected huge developers haven’t gone away and remain a real threat to economic stability. The troubles in China are a serious headwind for the struggling Australian dollar.
On the economic front, NAB Business Confidence slowed to 10 in April, down from 16 in March. Retail Sales for Q1 came in 1.2% QoQ, better than the forecast of 1.0%. We’ll get a look at Westpac Consumer Sentiment on Wednesday. The index has posted five straight declines, pointing to prolonged consumer pessimism about the economy.
The markets will be keeping a close eye on US inflation, which will be released on Wednesday. CPI surged to 8.5% YoY in March, the forecast for April stands at 8.1%. If inflation does ease, we’re bound to see plenty of headlines proclaiming that “inflation has peaked” and the US dollar could lose ground. It would be premature to argue that inflation is on its way down based on just one CPI reading. Furthermore, long-term inflation expectations have increased (3.7% to 3.9%), according to a NY Fed survey on Monday. True, one-year inflation expectations decreased (6.6 to 6.3%), but that won’t change the Fed’s aggressive tune.
- There is support at 0.6887 and 0.6745
- 0.6981 is a weak resistance line, followed by 0.7123
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