The AUD/USD currency pair surged towards the 0.6750 mark during Monday’s European session, capitalizing on significant US dollar weakness ahead of the Federal Reserve’s monetary policy meeting scheduled for Wednesday. The US Dollar Index (DXY), which tracks the greenback’s performance against six major currencies, fell below 100.70, contributing to the Aussie Dollar’s gains as investors shifted toward risk-sensitive assets.
Despite the recovery from Friday’s losses, the Australian dollar faces ongoing challenges, particularly from concerns over China’s economic performance and intermittent US dollar strength. While copper prices strengthened, iron ore prices—closely tied to China’s industrial sectors—experienced a slight dip, potentially limiting further gains for the Aussie dollar given China’s key role in Australia’s exports.
The Reserve Bank of Australia (RBA) maintained a cautious approach by keeping the Official Cash Rate (OCR) at 4.35% in August, citing persistent inflationary pressures. Discussions from the latest RBA Minutes indicated a hawkish stance, with members contemplating another rate hike, supported by RBA Governor Michelle Bullock’s comments warning of the risks of high inflation.
However, market expectations reflected in RBA cash rate futures still suggest an 85% probability of a 25 basis point cut by year-end. With the Fed likely to implement rate cuts, potentially supporting further gains for AUD/USD, the Australian dollar could benefit from the RBA’s expected extended restrictive policy.
Nevertheless, China’s slow post-pandemic recovery and deflationary concerns present a major headwind for the AUD. The lack of significant stimulus measures from the Chinese government has raised concerns about demand from the world’s second-largest economy, limiting further upside for the Australian dollar.
Additionally, the latest CFTC data for the week ending September 10 showed an increase in speculative net shorts for the Australian currency, reinforcing bearish sentiment as the Aussie dollar remains in net-short territory since Q2 2021.
Looking ahead, Australia’s Westpac Leading Index, set for release on September 18, could provide additional direction for AUD/USD.
Trade Idea:
Consider long positions on AUD/USD targeting 0.6800, with a stop-loss at 0.6690, capitalizing on USD weakness and RBA’s hawkish stance, while remaining cautious of China-related risks.