Australian Dollar, AUD / USD, China, RBA, Fed, Yields – Fourth Quarter Fundamental Forecast

  • The Australian dollar depreciated against the US dollar to end the third quarter
  • Bad news can be assessed in AUD / USD, but that could change in Q4
  • Commodities, USD, Yield Spreads, Delta, and China Can All Play a Role

To read the whole Australian dollar forecast, including technical perspectives, download our new 4Trading Guide Q of the Free DailyFX Trading Guides!

Q3 Recap – AUD / USD Consolidates

The Australian dollar hit a new low for the year in the third quarter. The reasons for the weakness include the collapse in the price of iron ore and other raw materials,China’s uncertainty, the spread of the Delta variant of Covid-19, the strength of the US dollar and interest rate differentials, among other factors.

China’s shared prosperity policy continues to have an impact

The Chinese Communist Party (CCP) has stipulated that Chinese steel plants should produce less steel in the second half of 2021 than in the second half of 2020. Although the price of iron ore is considerably lower than the high highs seen earlier in the year , it is still close to the highs seen until 2020. It is possible that the price will fall more, but maybe not much more.

An iron ore price close to USD 70-80 per tonne changes the dynamics as other producers become unprofitable near these levels. This creates a potential floor on the price of iron ore. Australian miners have a cost base of $ 20 per tonne, which is difficult to replicate due to the sheer scale of infrastructure required.

China has cracked down on various sectors of the economy and is likely to continue to do so as it implements its “shared prosperity” policy. This has the potential to derail market confidence and risk appetite, which would be negative for the AUD. However, the Evergrande episode showed that the CCP will intervene if necessary to safeguard any material weakness. Perhaps the worst of regulatory review is behind us.

Unblock the economy

Enter the 4e quarter, much of the Australian economy is stranded. New South Wales will roll out stay-at-home orders in October and other states will join them once they reach their vaccination goals. When this happened in 2020, economic activity increased significantly.

Central bank actions will have repercussions

The Federal Reserve has indicated that there will be a decrease in the amount of monthly bond purchases and this will likely be announced at its next meeting in November. US rates are unlikely to budge until next year at the earliest.

The RBA tightened monetary policy in the third quarter by reducing its bond buying program from AUD 5 billion per week to AUD 4 billion. They said they would continue at this rate until February 2022 and that interest rates would be held indefinitely.

10-year government bond yield spreads between Australia and the United States have always had a strong correlation with the AUD / USD. The differential had reached 18.5 basis points in favor of US yields in the third quarter, but is now approaching parity, supporting the Australian dollar.

The fourth quarter may come with unknown risks, possibly emanating from China or some other mutation of Covid-19, but if the Australian economy comes out of lockdown sharply, there could be favorable conditions for the Australian dollar.

Chart – AUD / USD and Australia / US 10-year government bond yield differential

Graphic vscreated in TradingView

To read the whole Australian dollar forecast, including technical perspectives, download our new 4Trading Guide Q of the Free DailyFX Trading Guides!

— Written by Daniel McCarthy, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @DanMcCathyFX on Twitter

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