Australian dollar price forecast October 5 2020| AUDUSD fundamental analysis

2020-10-05

Aussie goes against the wind. Forecast as of 05.10.2020Dmitri Demidenko

Uncertainty is not the best time for risky assets. However, it should ease sooner or later, which will help risky currencies gain back. We shall see if the AUD will strengthen and make an [AUDUSD][1] trading plan.

Monthly Australian dollar fundamental analysis

Hope for the best but do the rest. Although the major drivers of the [AUDUSD][1] 30% rally up from the March low have been the rapid recovery of China’s economy and the increase in the global risk appetite, the Australian dollar has domestic drivers as well. Australia efficiently manages the pandemic, and the government is willing to expand the fiscal stimulus. Australia’s Treasurer Josh Frydenberg is willing to provide money until the labor market returns to the full employment state. It is about the unemployment rate of 5%. The current unemployment rate is 6.8%, and it may grow to 8%-10%. It will hardly drop back to 5% before 2022.

Investors expect the Treasury to boost the fiscal stimulus. As a result, the net debt burden will increase to AU$712 billion or to 38% of the GDP. At the same time, the national debt ceiling will be increased above AU$1.1 trillion, and the income tax hike, planned for 2022, will be delayed. In the USA, the national debt exceeds 100% of GDP, in the euro- area, it is close to 100%, the Japanese government debt is more than 200%. Canberra can afford additional stimulus. Besides, the expansion of government bonds issue will support the capital inflow in Australia and strengthen the Aussie. Australia’s government bond rates are the highest among the countries issuing the G10 currencies.

Dynamics of Australia’s net debt, % of the GDP

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Source : Bloomberg

Carry trades and high investment rating of Australia’s securities support and will support the [AUDUSD][1] bulls amid the high risk appetite and low volatility. That is the reason for the AUD correlation with the US stock indices. The turmoil in the [S&P 500][2] market ahead of the US presidential election will suggest the AUDUSD consolidation.

Dynamics of AUDUSD and S&P 500

Source : Trading Economics

In addition to the size of the additional fiscal stimulus, investors are focused on the RBA’s willingness to expand the volume of monetary support. In September, the RBA officials discussed such measures as the interest-rate cut down to 0.1%, purchasing bonds with longer maturities than currently under QE, negative borrowing costs, and even FX interventions. The latter two options are aggressive, and the regulator will hardly resort to such measures. But it is likely to cut the interest rate by 12 basis points. The derivatives market suggests it will happen already this year.

Monthly [AUDUSD][1] trading plan

Expectations of monetary expansion is a bearish factor for the AUD. However, I don’t think the RBA will do it in October. It is likely to leave the door open for the interest rate cut in the future and set the Aussie bulls back using verbal interventions. The RBA will hardly turn the uptrend down, so, its dovish stance will give a chance to buy the pair of the price fall. Following ht consolidation in the range of 0.695-0.735, the [AUDUSD][1] is likely to continue its rally up to 0.76 and 0.79.

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Price chart of AUDUSD in real time mode

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