Australian dollar price forecast January 5 2021| AUDUSD fundamental analysis

2021-01-05

Aussie got one of the standing ovations. Forecast as of 05.01.2021Dmitri Demidenko

The [AUDUSD][1] rally should continue this year amid support from China and the commodity market. The major risk is Joe Biden’s attacks on China. However, I don’t think the US-China trade relations will worsen. Let us discuss the AUD outlook and make up an [AUDUSD][1] trading plan.

Quarterly Australian dollar fundamental forecast

The Australian dollar is trading up in early 2021, just like it was in late 2020. The tailwinds from China and the optimism in the commodity market allowed the [AUDUSD][1] bulls to push the price above the bottom figure 77, the level last seen in April 2018. Although Bloomberg experts do not include the Aussie in the list of G10 best-performers, the AUD should be rising in the first few months of the new year unless something unexpected happens.

China’s manufacturing PMI was 51.9 in December, services PMI was 55.7. The purchasing managers’ indexes were slightly down compared to November figures, but they are still above 50, which means the Chinese economy has been expanding over the last few months. Large banks increase the expected Chinese GDP growth. For example, Goldman Sachs suggests China’s economy should expand by 2.4%, up from the previous gauge of 2%, in 2020; in 2021, the GDP would grow by 8%, up from the previously expected 7.5%. Considering a downturn in the US GDP in the first quarter, the growth gap will support the yuan’s strengthening, supporting the [AUDUSD][1] bulls.

Dynamics of Australian dollar and Chinese yuan

Source : Trading Economics

The [USDCNH][2] has been below level 6.5 for the first time since mid-2018. According to Schroders, the pair continues falling amid higher interest rates in China and the US and the increase in China’s current account surplus. Furthermore, foreign investors’ demand for China’s assets is also up, as traders want to diversify their portfolios in favor of non-American securities.

Despite the deterioration of diplomatic relations between Canberra and Beijing, a full-fledged trade war should not start. China’s import tariffs do not affect the key elements of Australia’s exports. And there are some reasons.

Australia is the largest iron ore producer, the demand for which is constantly rising in the Asian economy. China produces nearly half of the world’s steel, and the production volumes are rising at a record pace. According to the World Steel Association, China’s steel production increased by 8% Y-o-Y and reached 87.7 million tonnes in November. Simultaneously, the deadly landslide in Brazil and the approach of the annual cyclone season in Australia increase the risks of production cuts and keep futures near the highest levels since 2011.

Dynamics of AUDUSD and iron ore

Source : Trading Economics

JP Morgan raised its forecast for average iron prices in 2021 by 20% to $126 per tonne; Jefferies Financial Group expects that in the first quarter, the iron price will fluctuate in the range of $180-$200 per tonne. However, Capital Economics and Citigroup suggest Chinese demand for iron ore should decline while the production will rise, which will push the futures prices down to $100 per tonne. If so, the support for the AUD will be replaced by the pressure.

Quarterly [AUDUSD][1] trading plan

After all, the [AUDUSD][1] bulls will be going ahead in the first quarter. A potential rise of political risks in the USA could press the pair down. We could enter long trades on the correction with the targets at 0.79 and 0.82.

Price chart of AUDUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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