Australian dollar price forecast 23 March 2021

2021-03-23

Aussie is on a losing streak. Forecast as of 23.03.2021Dmitri Demidenko

The flood in Australia’s eastern states will slow the country’s economy in the short term, and at the same time, will contribute to its rapid recovery from the natural disaster. The main reason for the [AUDUSD][1] correction is not related to the flood. Let us discuss the Forex outlook and make up a trading plan

Weekly Australian dollar fundamental forecast

Old growth drivers won’t get you very far, especially if the competitors have new ones. The main reasons for the 46% [AUDUSD][1] rally from the March 2020 low to the February 2021 high were the rapid growth in iron ore prices, the divergence in China’s economic growth with the rest of the world due to the pandemic, and, finally, hopes for improving relations between Washington and Beijing after Joe Biden’s victory. This year the Aussie’s benefits do not look as promising as in the past, while the greenback has a very serious reason for strengthening - the rapidly growing Treasury yields.

Due to interruptions in Brazil and Australia’s supplies and strong demand from China, iron ore became the most efficient instrument of the 2020 commodity market. Its price increased by 75%. At the beginning of March it even rose to $175 per ton, which is the highest level since September 2011. However, talk that Beijing will soon announce new emission reduction measures have pushed futures prices down to $167. China’s steel industry accounts for about 15% of all pollution, and it is rumored that the country will implement policies that restrict blast furnace steel production.

Although China’s industrial production and retail sales grew by 30% or more in March, last year’s low base is the primary reason. At the same time, the mutual accusations between Beijing and Washington during their Alaska meeting and the imposition of sanctions against China for violating Uighur rights indicate that a thaw in relations will not come soon.

In 2021, the greenback has a new growth driver - a rally in US Treasury bond yields. Bank of America Merrill Lynch notes that the combined movement of debt and equity has become the most negative since 1999. The fall in Treasuries stimulates the sell-off in the tech sector, which is starting to look overvalued.

Correlation dynamics of the US stock and bond markets

Source: Bloomberg.

[AUDUSD][1] bulls’ troubles are increasing as the RBA is committed to targeting Australia’s 3-year bond yields. Widening gap between Australian and US bond yields increases the demand for Treasuries, supporting the capital inflow into the US. As a result, the Aussie found itself in the same situation as the Japanese yen, the issuing central bank of which is pursuing a similar policy.

Dynamics of asset purchases and bond yields in Australia and Japan

Source: Bloomberg.

Weekly [AUDUSD][1] and monthly [AUDCAD][2] trading plans

In my opinion, the situation is not so gloomy. China will be one of the primary beneficiaries of Joe Biden’s fiscal stimulus, and the trade war is unlikely to resume. Moreover, the recovery of the Australian economy after the floods will help strengthen the national currency. If the [AUDUSD][1] bears fail to consolidate the price below 0.76-0.7615, it will be possible to start buying the pair. Against the backdrop of iron ore problems, [AUDCAD][2] sales with targets at 0.956 and 0.949 look profitable.

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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