Traders banking on a significant rally for the Australian dollar may face disappointment as China’s economic recovery loses momentum and Australia’s domestic economy shows signs of faltering.
While the Australian dollar has gained over 2% in May, potentially marking its best month this year, analysts suggest it may struggle to rise further. Australia is expected to be cautious in raising interest rates, and China’s economic support measures have been underwhelming, casting doubts on sustained growth.
These challenges imply that the Australian dollar will likely struggle to surpass the key resistance level of 69 US cents—a threshold it failed to breach three times last year, as highlighted by InTouch Capital Markets. The currency closed at 66.28 US cents on Friday.
“A number of stars would have to line up” for the Aussie to test 69 cents, said Richard Grace, a senior strategist at InTouch in Sydney. “It’s worth noting that it has struggled to breach that level when tested,” he added. Last year, the Aussie’s attempts to break past 69 cents were hindered by declining commodity prices amid concerns about China’s economy and a hawkish stance from the Federal Reserve that bolstered the US dollar. Currently, commodity prices are again falling from their highs, and the US dollar index has had its best week in over a month as Federal Reserve officials indicated that inflation must ease further before they consider rate cuts.
Despite these headwinds, the Australian dollar is unlikely to plummet from its current levels. It remains supported by non-dollar currency pairs, and short positions may decrease as the Reserve Bank of Australia (RBA) is expected to be among the last central banks to reduce interest rates. Although the Australian dollar will “struggle to rally significantly,” it may end the year at 68 US cents as market sentiment towards China stabilizes, said David Forrester, a senior strategist at Credit Agricole CIB in Singapore.
Expanded Analysis:
The Australian dollar’s recent gains have been driven by a mix of domestic and international factors. Optimism around China’s reopening initially boosted the Aussie, given Australia’s strong trade ties with China, especially in commodities. However, as China’s economic recovery appears less robust than anticipated, and with Australia’s economic indicators showing potential weaknesses, the rally’s sustainability is in question.
The RBA’s cautious approach to interest rate hikes reflects concerns about balancing inflation control with economic growth. As global commodity prices fluctuate and the US dollar remains strong, the Australian dollar faces significant resistance. The interplay between these factors will be crucial in determining whether the Australian dollar can sustain its gains or if it will face renewed pressure.
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