As Big Pippin mentioned in today’s edition of Daily Forex Chart Art, the Australian dollar seems to be getting exhausted with its recent rallies and may be looking to head south sooner or later. Aside from technicals, here are the fundamental factors that might push the Aussie down under.
1. Government budget cuts
The Australian dollar was under heavy selling pressure starting last week, thanks to the government’s announcement of budget cuts and structural changes. You see, current Prime Minister Tony Abbott and Treasurer Joe Hockey are aiming to turn the growing budget deficit into a surplus within the next ten years in order to avoid debt problems. However, this involves plenty of spending cuts, particularly in health care, welfare, higher education, and pensions.
Of course this announcement was met with plenty of protests, as the removal or reduction of some benefits will wind up eating a chunk of taxpayers’ disposable income. It didn’t help the Australian dollar that credit rating agency S&P warned that the Land Down Under’s prized AAA rating might be put in jeopardy if the government is unable to implement these budget cuts properly. That means the Australian government must do whatever it takes to trim the deficit, even if it means potentially weaker economic growth due to spending cuts.
2. Slowdown in China
With domestic growth expected to take a hit, the prospect of a downturn in demand from China would be a double-whammy for the Australian economy. As you’ve learned in the School of Pipsology lesson on major economies, China is the world’s second largest economy and is Australia’s number one trade buddy. In other words, a slowdown in China would not just hurt global economic performance, but it would also take a huge toll on Australia’s commodity exports.
China’s manufacturing PMIs from both HSBC and the government have reflected weaker performance in the industry. The latest GDP, retail sales, and fixed asset investment data have all been below average. To top it all off, commodity prices have been edging lower as demand slows down, which means that Australian exporters are able to collect smaller revenues.
3. Cautious RBA minutes
With that, it’s no surprise that the latest RBA minutes were peppered with cautious remarks. In particular, policymakers noted that inflation figures have been lower than expected and might continue to show bleak price pressures as wage growth has been minimal.
RBA officials noted that hiring and spending have moderated in the recent months but that this might not be sustained in the coming quarters. In addition, the minutes also showed that policymakers are not expecting further gains in export activity.
4. Return of risk aversion?
Fresh off the press today is the news that martial law has been declared in Thailand. While this may not directly affect the Australian economy, this political instability might result to more conflict in the country and weigh on market risk sentiment.
Bear in mind that the turmoil in Ukraine and Russia still hasn’t subsided. As discussed in the School lesson on Fundamental Analysis, geopolitical risk tends to result in a flight to safety, which doesn’t bode well for higher-yielding currencies like the Australian dollar.
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