September 25, 2022

Hardwood Paroxysm

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Between the rise of the US dollar and the deterioration of conditions in China, the outlook for the Australian dollar looks bleak

The AUD/USD pair fell to its lowest level since July 21, as the Australian dollar fell more than 3% against the US dollar during the previous week. The Australian dollar fell compared to most of its major competitors, such as the British pound, the euro and the Japanese yen, as investors sought the safety of the US dollar in the face of weak Fed pivot bets, which caused sales.

Employment data for July sent mixed messages. Despite losing 40,900 jobs per month, Australia’s unemployment rate fell to 3.4%. Wage growth in the second quarter was 2.6% compared to the same period last year, lower than Bloomberg’s estimate of 2.7% but higher than the 2.4% recorded in the first quarter.

Both the manufacturing PMI and the services PMI will be updated weekly next week. Standard & Poor’s statistics released in early August may have an impact on interest rate hike expectations. On August 2, the Reserve Bank of Australia raised the interest rate to 1.85%. The chart below shows the resulting increase in rate hike expectations for the remainder of 2022.

In general, higher interest rates are a good thing for the currency. Meanwhile, the Australian dollar is the subject of betting by currency traders. The CFTC’s COT (Commitment of Traders) data showed that net positions on the Australian dollar fell to -59,248 on Friday. Since the beginning of March, the most important position has been short selling. Since July, the price has reached a new low, offering short positions an attractive target.

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There are two main reasons why investors may invest against the Australian dollar. First, the faltering Chinese economy faces a difficult road to recovery. Despite rumors of a rate cut by the People’s Bank of China (PBOC) on Monday, it may not be enough to spur credit expansion.

The Federal Reserve’s decision to cut the interest rate on the multilateral fund for one year surprised investors. Investors saw the stock as a potential sign of panic. The heat wave, combined with the random shutdown of Covid, has caused some industrial centers to close their factories to reduce energy consumption.

The second is a shift away from optimism that the Fed will start cutting interest rates by next summer. James Pollard and Esther George, current members of the Federal Open Market Committee, are the latest to disagree with this assessment.

US stocks fell on Friday as traders re-positioned themselves ahead of Jackson Hole inflation data and US personal consumption expenditures. As long as you are prepared to face the Fed’s reaction, hiring him is a good idea. I heard Jerome Powell is about to deliver the knockout blow. This would be bad news for the Australian dollar, which is already suffering from mounting headwinds for its main trading partner.