AUD/USD at Risk Amid Less-Dovish Fed, PBOC Normalization, Australia-China Tensions: Q3 Top Trading Opportunities

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AUD/USD Bearish – Q3 Top Trading Opportunity

  • Sentiment-linked Australian Dollar fell in Q2 despite rosy trader mood
  • Federal Reserve appears to be shaping up to be less dovish versus RBA
  • AUD/USD may struggle amid important spillovers from China in Q3

See the favorite trades from each DailyFX Analyst for the third quarter. Download our new 3Q top trading opportunities guide from the DailyFX Free Trading Guides!

The Australian Dollar topped against the US Dollar in the first quarter and continued its slow and steady descent in the following three months. The third quarter could look similar, with AUD/USD struggling. That is because it might be weighed down by a combination of a less-dovish Federal Reserve and ongoing developments in China that pose a risk to the currency’s trajectory.

In the US, the Fed is becoming less dovish. June’s monetary policy announcement showed a consensus for two rate hikes by the end of 2023, perhaps. This also likely implies that a tapering of its balance sheet could come sooner than anticipated. Meanwhile, the Reserve Bank of Australia reported that the cash rate may not increase until 2024 at the earliest.

As such, the yield advantage may go to the US Dollar in the long run as market sentiment momentum likely struggles to achieve the same breakneck pace set throughout most of last year. This is something that the growth-linked Australian Dollar could use to rekindle its upward momentum, and remains an upside factor for AUD/USD.

However in China, Australia’s largest trading partner, the People’s Bank of China (PBOC) has already been normalizing monetary policy to a certain extent. The central bank has been draining liquidity for most of this year via open market operations. This is as corporate bond issuance shrunk by the most since 2017 in May.

China’s government is trying to tackle exuberance in financial markets, expressing concerns over market bubbles and speculation in commodities. The nation is working to release metal reserves in an effort to tame soaring prices, such as what has been seen in copper. Meanwhile, geopolitical tensions between China and Australia are brewing.

In the aftermath of the Covid-19 breakout, Australia called for an investigation (along with other international communities) into China’s handling of the coronavirus. The latter responded by imposing tariffs on certain Australian products. China also sued Australia over anti-dumping measures at the World Trade Organization towards the end of June.

A combination of a less-dovish Fed, the PBOC’s normalization and deteriorating Sino-Australian tensions risks boding ill for the Aussie Dollar during the third quarter. Due to close trading relationships, economic developments in China often produce a knock-on impact for Australia. Given the sentiment-linked nature of the Aussie Dollar, this does not seem to bode well.

On the chart below, a custom majors-based Australian Dollar index can be seen aiming lower with the CSI 300 and copper prices. The index averages AUD against USD, EUR, GBP and JPY. Moreover, the momentum between the 3 data series that was seen after March 2020 has been noticeably slowing. More of the same could be ahead.

See the favorite trades from each DailyFX Analyst for the third quarter. Download our new 3Q top trading opportunities guide from the DailyFX Free Trading Guides!

Majors-Based AUD Index Versus CSI 300 and Copper Futures – Daily Chart

Chart Created Using TradingView

— Written by Daniel Dubrovsky, Strategist for DailyFX.com

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

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