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Australian Dollar Outlook:  External Factors Dominate AUD/USD, Will it Break Free?

Australian Dollar Outlook: External Factors Dominate AUD/USD, Will it Break Free?

Daniel McCarthy, Strategist
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AUSTRALIAN DOLLAR FORECAST: NEUTRAL

  • The Australian Dollar is in the hands of foreign influence for now
  • Risk assets like AUD may underperform in an escalation of conflict woes
  • Commodities underpin AUD, but will Fed hikes undermine AUD/USD?

The Australian Dollar was caught in the crossfire of escalating geopolitical tensions this week and it doesn’t look like they will be going away anytime soon.

The situation in Ukraine is evolving and the surrounding uncertainty has seen high risk assets sell off and perceived safe havens appreciate.

The Australian Dollar is seen as a risk asset due to Australia’s composition of trade being aligned to global growth prospects.

The fundamental backdrop for the Aussie remains sound despite the headlines of lower iron ore prices on both the Dalian commodity exchange (DCE) and the Singapore exchange (SGX).

BHP and Fortescue reported solid earnings this week and as the big players in the iron ore market, they highlighted again that they do not rely on futures exchange pricing of their base metal, but rather, they have long term contracts.

They have both re-iterated that they see demand from China remaining steady for 2022.

Additionally, Australia’s other top 5 exports are all in high demand and commanding premium pricing. Those commodities being liquified natural gas (LNG), oil, gas, coal and gold.

The AU-US yield differential has widened slightly in favour of AUD with the 10-year spread back over 20 basis points.

However, the short end backdrop leans toward USD with the Fed set for rates lift off at their March Federal Open Market Committee (FOMC) meeting. The RBA on the other hand have no plans for rate hikes, although the market is pricing an increase in July.

Unemployment numbers for January were released during the week and hit expectations, coming in at 4.2%. The participation rate was slightly up at 66.2%, while 12,900 jobs were added.

The calendar ahead is looking pretty thin with the wage price index being the highlight of the week on Thursday.

The outlook for the Aussie in the week ahead appears to at the whim of events in Ukraine. Heightened uncertainty works against AUD, but a resolution or de-escalation would be supportive. With disciplined risk management, as always, opportunities may arise.

AUD/USD, IRON ORE, CRUDE OIL, AU-US 10-YEAR SPREAD

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Chart created in TradingView --- Written by Daniel McCarthy, Strategist for DailyFX.com

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

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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